Section 3: S Corporations Flashcards
S-Corp Tax Return
- 1120-S - treated like partnership
- Income reported by an S-Corp is allocated to the shareholders (K-1), who report their share of income on 1040.
Who can elect to be an S-Corp?
- No more than 100 shareholders
- Family members with common ancestor no more than 6 generations above and their spouses may be treated as single shareholder
- All shareholders must be individuals
- No corps, partnerships, or big trusts
- Grantor and Tesamentary trusts are okay
- Husband and wife are one shareholder until divorce is final
- All shreholders must be residents or citizens of the U.S.
- The corp must be domestic corp
- There can only be one class of stock (no preferred)
Election to become an S-Corp
Must be unanimous 100% approval by shareholders
Calculating Net Basis
Initial Basis
+/- % Income/Loss
+/- Muni Bond Interest
+/-Separately Stated Items
- Distributions Rec’d
Net Basis
S Corp Income
- Ordinary Income/Loss
- Muni Bond Interest
- Separately Stated Items
- Income computed on an Avg. Daily Basis
S Corp Losses
- Limited to amount invested + amount loaned to the compnay (the amount “at-risk” for the investor)
- Cannot go below zero
Muni Bond Interest
- Increases basis
- Not taxable
Distributions Received
- Reduces basis
- Not taxed
Separately Stated Items
- Any amount that can hit a limit on your 1040
- Capital Gains/Losses
- Sec 1231 Gains/Losses
- Sec 179 depreciation deduction
- Rent and Royalty Income
- Charitable Contributions
- Interest income on Investments
S Corp Allocation of Income
Allocated on an Avg. Daily Basis
Assume 100 shares reported with $365k income
Shareholder bought 5 shares on 11/30
365/365 days(assumed) = 1k/day
1k/100 shares = $10/share
SH = $10 x 5sh x 31 days held = $1,550
Form 1120-S
required annual information return reporting income and the allocation of that income to the various Shareholders
Distributions to Shareholders
- Are nontaxable to the extent of the Accumulated Adjustment Account (AAA) and are applied to reduce the AAA and shareholder’s stock basis
- AAA represents the cumulative total of undistributed net income items for S corps taxable yrs beginning after 1982
- Non taxable when distributed
- Accumulated Earnings and Profits (AEP) represent earning and profits that were accumulated (and never taxed to shareholders) during C corp taxable yrs
- Taxabele to shareholders when distributed
- AAA represents the cumulative total of undistributed net income items for S corps taxable yrs beginning after 1982
Health Insurance Premiums
- Fring Benefits pd by S Corp for a more than 2% shareholder-employee are deductible by the S-corp as compensation an includible in the shareholder-employee’s gross income of W-2
S Status Termination
- Voluntary
- Majority vote - 50%
- Involuntary
- Status revoked automatically if an event occurs that causes it to violate on of the requirements (ex: shares sold to non-resident alien)
- Once revoked, cannot reelect status for 5 years
- Status revoked automatically if an event occurs that causes it to violate on of the requirements (ex: shares sold to non-resident alien)
Built-In Gains Tax
- Applies if a C corp elects S corp status and the FMV of its assets exceeds their bases.
- The difference is a net unrealized built-in gain
- If the assets are sold within 5 yrs, a special built-in gains tax of 35% applies
