Tax - S-Corporation Flashcards
Income tax
S-corporations are not subject to income tax.
Company’s taxable income or loss flow through to the shareholders and are reported on individual income tax returns.
Separately vs non-separately stated income
Separately stated items are any items of income, loss, deduction, or credit which could affect the tax liability of a shareholder. These items are passed through pro rata to the shareholders with the same character.
Includes:
– Rental income
– Interest income
– Long-term capital gains
Non-separately stated income includes=
Gross receipts
- COGS
- Compensation paid to shareholder
Taxable income
Determined in almost the same way as for a partnership.
Allowable deductions
Similar to individuals with following exceptions: – Itemized deductions – Personal exemptions – Net operating loss deductions – Charitable contributions – Foreign taxes – Oil and gas depletion
Exclusions from taxable income
– Tax-exempt income – Section 1231 gains and losses – LT and ST capital games and losses – Charitable contributions – Passive income and loss – Portfolio income and loss – Section 179 expense deduction – Non-business income or loss – Depletion – Discharge of indebtedness – Investment income and expenses – Wagering gains or losses – Gain or loss on sale of collectibles – Intangible drilling costs – Mining exploration expenditures – Amortization of reforestation expenditures – Recoveries of prior taxes, bad debts and delinquency amounts
Items listed separately
– Tax credits
– Tax preferences and AMT adjustment items
– Foreign taxes
Shareholder tax return
Include the share of corporations income or loss and special items from corporate tax year that ended with or within personal tax year.
Income is recognize on basis similar to partnerships.
– If ownership change during year, each owner must recognize pro rata share of income or loss allocated on daily basis
– Loss passthroughs in excess of taxpayer’s basis in corporation may be carried forward indefinitely and deducted when taxpayer’s basis has increased sufficiently to absorb loss
Basis of shareholders interest
Shareholder’s tax basis is increased by stock purchases and capital contributions.
The following are adjustments to basis (per shareholder’s allocated share).
But basis can never go below zero.
Upward adjustments:
– Taxable income
– Separately stated income items
– Depletion in excess of properties basis
Outward adjustments: – Loss from operations – Separately stated loss items – Nontaxable distributions: return of capital – Nondeductible loss items
Distributions
Distributions of cash and property are basically given same treatment, FMV.
Taxability of distribution determined by source.
Distributions come from sources in order:
– From accumulated adjustments account: represents income earned after 1982 with adjustments. These distributions are nontaxable.
– From dividends to extent of accumulated E&P
– For return of capital
– Last, capital gain
If distribution is appreciated property, transfer treated as if property had been sold at FMV:
– Game recognized at corporate level
– Game subsequently passed through to shareholders
Built-in gains tax
When regular C Corp. converse to S Corp. status, tax may be imposed on net appreciation on assets held during C Corp.
– Imposed on S Corp. when disposes of property at gain within certain number of years
– Tax levied on pre-S Corp. appreciation only.
* independent appraisal of assets should be obtained when converting.
Terminating S Corp. status
If terminate status, must wait five years or get IRS consent to be able to reelect status
