Module 1: S Corporations

Question 1

Form 2553

Answer 1

Form to elect to be treated as an S corp

Question 2

When would a contribution be tax-free?

Answer 2

If it is:

1. a contribution of property (not services)
2. Solely in exchange for stock
3. After the transfer, the shareholder has control of the corp through 80% stock ownership

Question 3

What requirements must be met to qualify as an S corp?

Answer 3

1. Qualified corp
   - Domestic
   - not consolidated with C corp
2. Eligible shareholders
   - individual, estate, or certain types of trusts
   - may not be a nonresident alien
   - may not be corp or partnership
3. Shareholder limit
   - 100 shareholders (family = one)
4. One class of stock

Question 4

What form must S corps file and when is their tax return due?

Answer 4

1120S

March 15

Question 5

What are the 3 principal taxes imposed on S corps?

Answer 5

1. LIFO Recapture Tax
2. Built-In Gains Tax
3. Tax on Passive Investment Income

Question 6

LIFO Recapture Tax

Answer 6

Resulting tax on the excess of inventory computed under FIFO over LIFO (cumulative basis)

Question 7

When would an unrealized build-in gain result?

Answer 7

When the following 2 conditions occur:

1. C corp elects S corp status; and
2. FMV of corp assets exceeds adj. basis of corp assets on election date

Question 8

What is the amount of built-in gain recognized limited to?

Answer 8

The net unrealized built-in gain less any build-in gain previously recognized

Question 9

Under which circumstances is an S corp exempt from a tax on built-in gains?

Answer 9

• S copr was never a C corp
• Sale/transfer does not occur w/in 10 years of 1st day of 1st year of S election
• S corp can demonstrate that appreciation occurred after S election
• S corp can demonstrate distributed asset was acquired after S election
• Net unrealized built-in gain has been completely recognized in prior tax years

Question 10

How is the tax on built-in gain calculated?

Answer 10

35% x the lesser of:

• recognized built-in gain for current year
• taxable income of S corp if it were C corp

Question 11

When would a corp be subject to a 35% tax on the lesser of NI or excess passive investment income?

Answer 11

If the following 2 tests are met:

1. S corp has accum C corp E&P (from prior years)
2. Passive investment income > 25% of gross receipts

Question 12

What are pass-through losses limited to?

Answer 12

Limited to the s/h’s adjusted basis in S corp stock + direct s/h loans to corp

Question 13

What would increase the taxpayer’s at-risk amount?

Answer 13

1. Contribution of cash or other property to the corp
2. Loans to the corp
3. Allocable share of income distributed

Question 14

What would reduce the taxpayer’s at-risk amount??

Answer 14

1. Allocable share of losses

2. Distributions of cash or other property

Question 15

What items flow through to the s/h’s K-1?

Answer 15

1. Ordinary income
2. Rental income/loss
3. Portfolio income
4. Tax-exempt interest
5. Percentage depletion
6. Foreign income tax
7. Section 1231 gains/losses
8. Charitable contributions
9. Expense deduction for recovery property (sec. 179)
10. Unrecaptured sec. 1250 income
11. Gain/loss from sale of collectibles

Question 16

How are fringe benefits treated for S corps?

Answer 16

Deductible for non-shareholder employees and those employee shareholders owning 2% or less of S corp

Question 17

How are the costs of fringe benefits treated?

Answer 17

Not deductible for shareholders owning over 2% of S corp

Question 18

What increases the accum. adj. acct (AAA)?

Answer 18

Separately and non-separately stated income and gains

Question 19

What decreases the AAA?

Answer 19

Corporate distributions, separately and non-separately stated expense items and losses, and nondeductible expenses

Question 20

What is the other adjustments account?

Answer 20

A bookkeeping account that is designed to keep a cumulative record of items which affect S corporation s/hs’ basis but do not affect the AAA
(tax-exempt interest, federal taxes attributable to C corp years)

Question 21

How is the S/H basis in S corp stock computed?

BASE

Answer 21

Basis (Initial basis)
Add:
- Income items
- Additional s/h investments in corp stock
Subtract:
- Distributions to s/h
- Loss or expense items
= Ending basis

Question 22

When would an S corp status terminate?

Answer 22

1. Voluntary revocation
2. Corp fails to meet any/all of eligibility requirements for S corp status
3. > 25% of corp’s gross receipts come from passive investment income for 3 consecutive year and corp had C corp E&P at end of each year

Question 23

How long does a corp have to wait after S corp election termination/revocation to make a new election?

Answer 23

5 years, unless IRS consents to an earlier election

Question 24

How is the taxable gain/loss for s/hs calculated for liquidation distributions?

Answer 24

Cash
FMV property

= Taxable gain/loss

Question 25

What is the order in which stock basis is increased or decreased?

Answer 25

1. Increased for income items and excess depletion
2. Decreased for distributions
3. Decreased for non-deductible, non-capital expenses and depletion
4. Decreased for items of loss and deduction