Chapter 11

Question 0

Can S-corp own stock in C-corp

Answer 0

Yes

C-corp may not be a shareholder in S-corp, only individuals, estates. S-corp is not publicly traded

Question 1

S-Corp shareholder requirements

Answer 1

On each day of the year
• not more than 100 shareholders
• only individuals, estates, trusts (2 year holding period for trusts)
• only US citizens or US residents

Question 2

How many S-corp have one owner?

Answer 2

About 61% in 2009

Question 3

S-Corp corporation requirements?

Answer 3

1) Must be a domestic corporation
2) Must not be an “ineligible” corporation (have special tax status like bank or insurance company, or PR tax credit)
3) Must have only one class of stock

Question 4

S-corporations are exempt from which taxes?

Answer 4

Federal income tax, AE tax, PHC tax, corporate AMT

Question 5

How is S-corporation election made?

Answer 5

File Form 2553 any time before tax year, or before the 15th day of the 3rd month of the year the election is to be effective

Question 6

How many shareholders must consent to S-corp election?

Answer 6

ALL shareholders.
If election is made after the beginning of the tax year, all who own stock at any time during the preceding year (even if not a current shareholder) must give consent.

Question 7

What form do shareholder report s-corp income?

Answer 7

Ordinary income - Form 1120s

Separately stated - Schedule K

Question 8

S-corp election terminates when?

Answer 8

On the day of the terminating event:

• exceeding 100 shareholders
• ineligible shareholder
• second class of stock
• failing passive income test for 3 consecutive years

Question 9

What is the passive income test?

Answer 9

applied annually
terminates s-election if >25% of gross receipts are passive income for past 3 years AND corp has E&P from c-corp earnings

terminates s-election first day of next tax year

Question 10

Allocation of income after termination of s-corp

Answer 10

terminating event occurs on day other than first day of tax year

S short year begins on first day of tax year and ends on day preceding termination date

C short year begins on termination date and continues through end of the tax year

Question 11

How long must company wait to make new election after termination?

Answer 11

five tax years

Question 12

S-corp taxable year?

Answer 12

ending 12/31 most common (calendar year)

Question 13

What does Section 444 allow?

Answer 13

election of a fiscal year other than calendar year

Question 14

When is S-corp allowed to use other than calendar year?

Answer 14

• Ownership year (more than 50% of shareholders use this tax year)
• Natural business year
• Facts & circumstances

Question 15

What accounting method do most s-corp use?

Answer 15

Accrual is most common

must use same method for tax accounting

Question 16

Name some separately stated items

Answer 16

• Net ST capital G/L
• Net LT capital G/L
• Charitable contributions
• Dividends and interest payments
• taxes paid/accrued to a foreign country
• Investment income/expense
• Tax-exempt interest

Question 17

S-Corp cannot claim the following deductions

Answer 17

• dividends-received deduction
• US production activity deduction

both of these pass-through to shareholders

Question 18

Can S-corp amortize start-up expenses?

Answer 18

S-corp can amortize organizational expenditures (Sec 248) after deducting up to $5,000

Question 19

Carryover/carryback with status change

Answer 19

No carryovers/carrybacks originating in C-corp carry to S-corp

No carryovers/carrybacks originating in S-corp carry to C-corp

Question 20

Losses from S-corp…

Answer 20

pass through to the shareholder, and if > shareholder’s income for the year can create a NOL carryover/carryback for the shareholder

Question 21

Name 4 special S-corp taxes

Answer 21

1) Excess net passive income tax
2) Built-in gains tax (Sec 1374 tax)
3) LIFO recapture tax
4) recapture of business tax credits

Question 22

What is Sec 1375 tax (excess passive income tax)

Answer 22

applies when s-corp has >25% passive investment income and has c-corp aE&P

Question 23

How is excess net passive income tax calculated?

Answer 23

Excess net passive income x highest corp tax rate (35%)

Excess net passive income = net passive income x (passive inv inc - 25% of gross receipts)/passive inv inc

Question 24

What is built-in-gains (Sec 1374) tax?

Answer 24

tax on gain of FMV of assets that were obtained while c-corp (before s-election was made) purpose was to prevent taxpayers from avoiding corp tax by making s-election before distributing/selling assets. On day of conversion, must have appraisal of all assets on BS. If FMV>tax basis, record built-in gain

Question 25

LIFO recapture tax

Answer 25

(FIFO inventory basis - LIFO inventory basis) at the close of last c-corp tax year LIFO recapture amount is included in gross income & increases basis of inventory Tax is payable in 4 installments of 25% each year

Question 26

Income allocation procedures

Answer 26

1) to each day (divide amount by number of tax days) 2) to each share (divide daily amount by shares outstanding) 3) totaling daily allocation for each share of stock 4) totaling amount held by stockholder

Question 27

Shareholder loss limitation

Answer 27

loss is limited to adjusted basis of stock + indebtedness owed directly to the shareholder

Question 28

How is the stock basis limitation for loss calculated

Answer 28

1) Increase basis by any capital contributions 2) Increase basis for ordinary income and separately stated income/gain 3) Decrease basis for distributions not included in shareholder income 4) Decrease basis for nondeductible, noncapital expenditures

Question 29

Does s-corp loss transfer?

Answer 29

If stock is sold with unused losses, these do not transfer. If stock is transferred to a spouse or former spouse, the losses transfer and can be deducted when sufficient basis is obtained

Question 30

Name 3 special loss/deduction limits for s-corp shareholders

Answer 30

1) At-risk rules: shareholder can deduct loss only to the extent the shareholder is at risk 2) Passive activity limitation: must meet materially participation 7 rules or s-corp loss cannot be deducted against salary or "active" income 3) Hobby loss: must have positive income for 3 of 5 business years

Question 31

Who is responsible for tracking shareholder basis

Answer 31

the shareholder must adjust basis annually

Question 32

What increases shareholder basis

Answer 32

Initial investment + capital contributions + allocable share of ordinary income + allocable share of separately stated income/gain

Question 33

What decreases shareholder basis

Answer 33

- Distributions excluded from shareholder's gross income - allocable share of any expense not deductible as ordinary - allocable share of ordinary loss - allocable share of separately stated loss/deduction items

Question 34

Does non-taxable income increase shareholder basis?

Answer 34

Yes. | Ordinary and separately stated items increase basis whether taxable, tax-exempt, or receive preferred tax treatment

Question 35

Describe s-corp distribution if firm made s-election in initial tax year

Answer 35

Distributions are non-taxable & reduce shareholder's basis, not below 0. If distribution > basis, treat as gain from sale/exchange

Question 36

How is stockholder basis calculated

Answer 36

In ORDER ``` Basis + capital contributions + allocable share ordinary income + allocable share sep stated items - Distributions - allocable share of ordinary loss - allocable share of separately stated loss = ADJUSTED BASIS FOR STOCK ```

Question 37

S-corp file what tax forms?

Answer 37

Form 1120s & Schedule K

Question 38

What is schedule K-1

Answer 38

s-corp furnishes, shareholder's share of income/deduction/credits

Question 39

Must s-corp make estimated tax payments?

Answer 39

Yes, if estimated tax liability >$500

Question 40

How many corporations are s-corp?

Answer 40

66.8% in 2011

Question 41

When is calendar-year S-corp tax return due?

Answer 41

March 15