T3-M1 S Corporation and Advanced Topic Flashcards
what are the 3 requirements for a nontaxable property contribution to an S corporation?
- a contribution of property (not services)
- solely exchange for stock (no boot); and
- after the transfer, the shareholder/group of shareholder has 80% or more control of the corporation
- if these requirements are not met, the transfer/contribution will be treated as a taxable sale and gain will be recognized by the shareholder.
- shareholder’s basis in the contributed property: adjusted basis of the property + any gain recognized from the property - any liability assumed
- S corp’s basis in the property contributed is the SAME as the contributing shareholder’s basis (plus any liability assumed by the S corp)
- shareholder’s initial stock basis = cash contributed + adjusted basis of property contributed (reduced by any liability assumed by the S corp) + FMV of services contributed
what are the 3 corporate-level taxes for S corp?
S corp generally does not pay taxes at entity level. However, there are 3 exceptions if the S corp was a C corp previously:
- LIFO recapture tax: excess of inventory computed using FIFO method over the inventory computed using LIFO method
- Built-in gains tax: FMV of the corp ASSETS exceeds the adjusted basis of the corp assets on the election date
- tax on passive investment income
what are the 5 EXEMPTIONS from recognition of built-in gain?
- the S corp was NEVER a C corp
- sale/transfer of assets does NOT occur within 5 years of the first day that the S election is effective
- S corp can demonstrate the appreciation in the assets being sold/transferred occurred AFTER the S election
- S corp can demonstrate that distributed assets were acquired after the S election
- total net unrealized built-in gains has been completely recognized in prior years
what is built-in gains tax calculation?
take the C corp tax rate 21% multiply it with the LESSER of the:
- recognized built-in gain for CY
- total net unrealized built-in gain at S election less net unrealized built-in gains recognized in previous years; or
- taxable income of the S corp if it were a C corp (excluding DRD)
when is an S corp subject to tax on passive investment income***?
an S corp is subject to 21% tax rate on the LESSER of NI or excess passive investment income if the following 2 tests are met:
- S corp has C corp accumulated E&P (retained earnings)
- passive investment income > 25% of total gross receipts
- passive investment income includes: royalties, dividends, interest, rents, and annuities
what are the limitations on pass through for deductions on S corp shareholder’s individual tax return?
- tax basis = stock basis (reduced by any distributions) + debt basis (direct shareholder loans to S corporation)
ex: stock basis = cash contributed + basis in land contributed + undistributed share of income from S corp - at-risk basis = stock basis + recourse debt
what are important items regarding allocation of S corporation income (loss) among shareholders?
- Allocations to shareholders are made on per-share, per-day basis
- common separately stated items:
- RRE income/loss => sch E, passive income
- interest and dividend income => sch B, passive income
- royalties => sch E, passive income
- net STCG/L, LTCG/L, and sec 1231 gain/loss => sch D
- charitable contributions => sch A, itemized deductions
- Sec 179 expense deduction - a below-the-line deduction of 20% of QBI income (ordinary business income flowed through from S corp)
- Accumulated Adjustments Account (AAA): is the accumulated E&P during the years the corp is an S corp. Distributions may not reduce AAA below zero. However, AAA can be negative due to S corp losses from operations
- Items increase AAA
+ ordinary business income
+ separately stated income and gain items (other than tax-exempt income)
- Items decrease AAA
+ ordinary business loss
+ separately stated losses and deductions
+ nondeductible expenses (other than expenses related to tax-exempt income)
+ distributions (may not reduce AAA below zero) - Other Adjustment Account (OAA): is an account that keeps a cumulative record of items that affect S corp shareholder’s stock basis BUT DO NOT affect AAA. the OAA does not impact taxability of S corp distributions.
- tax-exempt interest on municipal bonds and related expenses
- tax-exempt life insurance proceeds and related nondeductible premiums
- federal taxes paid or accrued in S corp year that relate to C corp years
what are tax results and treatment of S corp distribution with/without a C corp E&P?
see notes in excel
what 3 events will terminate S election and effective date***?
- shareholders holding more than 50% of stock (voting and nonvoting) consent to a voluntary revocation. effective date of termination:
+ the S corp can specify an effective date when filed with the IRS
+ if no date is specified and the revocation is filed BY 3/15, the effective date is Jan. 1 of CY
+ if revocation is filed AFTER 3/15, the effective date is Jan. 1 of the following year - the corp fails to meet any qualifications of S status????? effective immediately
- ***excess passive investment income: more than 25% of the corp’s gross receipts are from passive investment income for 3 consecutive years (but only if the corp has prior C corp E&P). effective at beginning of the 4th year
- generally, the entity has to wait 5 years to reelect S corp status
- after being terminated as an S corp, the entity is back to be a C corp and would need to file 2 short year tax returns: S corp before termination and C corp after termination and allocate income/loss by 2 methods:
+ relative number of days
+ closing books on the date of conversion
what are tax consequences of liquidation of an S corp?
- for S corp, the corp will recognize gain or loss on the distribution of property as if the property was sold at FMV:
FMV of assets distributed - basis in assets
= taxable gain/loss - for shareholders,
cash received
+ FMV of property received - liabilities assumed by shareholders
= amount realized - basis in stock
= taxable gain/loss
