Topic 4 - Tax Treatment For S Corporations Flashcards
What are the limitations of an S-Corp
Only US Citizens or residents, estates, certain trusts, and some tax exempt organizations can be shareholders.
No Corp or Partnerships can be shareholders
No more than 100 shareholders (though family within 6 gens count as 1)
Large publicly traded corps cannot elect to be a corps
What types of corporations are ineligible to become S Corps?
Financial Institutions using reserve method of accounting and insurance companies
When is the deadline for a corporation to file Form 2553 (elect to S Corp status) to use current tax year?
The 15th day of the third month
How can an S Corp voluntarily terminate their S Corp status
Shareholders holding more than 50% agree
File election with IRS stating effective date of revocation and number of shares issued and outstanding
How can an S Corp involuntarily terminate their S Corp status
If the entity ceases to qualify as a small business corporation
Passive income exceeds the passive income limitation
What happens when an S Corp has a short tax year?
Must allocate income between the S Corp short year and C Corp short year by using either the daily method or specific identification method
When allocating income during a short tax year, how do you use the daily method?
Take the entire years income and divide by 365, multiple that number by how many days were in the short tax year
When allocating income during a short tax year, how do you use the specific allocation method?
Determine how much money was actually made during the short tax year
How can a former S Corp re-elect to S Corp status?
Must wait to the beginning of the 5th year after the tax year in which it terminated to re-elect
IRS may allow early election if the corporation is now owned by more than 50% new shareholders or the termination was beyond the control of the corporation
What is the one circumstance when an S Corp can not choose its own accounting method?
If selling inventory is a material component of business. For that, they must use accrual
What form is filed for an S Corp tax return?
Form 1120S
What is a Schedule K-1 used for?
Supplied to each shareholder detailing the amount and character of items of income and loss flowing through the S Corporation.
The shareholder then reports the income and loss on their individual tax return regardless if they got any cash distribution
How can an S corporation shareholder increase their tax basis?
The shareholder can loan money directly to the corporation. These loans create debt basis (separate from stock basis). But you can use this to increase your tax basis and get a deduction down to $0
Loan must be directly to the corporation; they do not get debt basis when they guarantee a loan for the S Corp.
