What are the eligibility reqs for an S Corporation election?
1) Domestic corporation
2) One class of stock (differences in common stock voting rights are allowed)
3) Eligible shareholders must be individuals (no nonres alien shareholders), estates, or certain types of trusts (not corporations or partnerships)
4) One hundred shareholder limit
Describe the two reqs for election of S Corp status
1) All shareholders must consent.
2) Election must be made either at any time during the year immediately preceding the year for which the election will be effective or on or before the 15th day of the third month of the election year (and the election will be retroactive to the first day of the election year).
How can S corp status be terminated?
1) Holders of a majority of the stock consent to a voluntary termination.
2) The corp fails to meet any or all of the eligibility reqs.
3) More than 25% of the corps gross receipts come from passive activities for 3 consecutive years and the corp had C Corp earnings and profits at the end of each year. The S Corp status is terminated as of the beginning of the 4th year.
*Once the S Corp election is terminated or revoked, a new election cannot be made for 5 years, unless the IRS consents to an earlier election.
What Form do S Corps file?
What tax year must an S corp adopt?
An S corp must adopt a calendar year (Dec 31 year end) unless a valid business purpose for a different tax year (fiscal year) is established.
What taxes are imposed on S corps?
- LIFO Recapture Tax
- Built-in Gains Tax
- Tax on Passive Investment Income
When does an unrealized built in gain result for S Corps?
Two conditions must occur:
- An unrealized built in gain results when a C corp elects S corp status and
- the FMV of corp assets exceeds the adjusted basis of the corp assets at the election date.
When is an S corp exempt from a tax on built in gains?
1) The sale or transfer does not occur within 10 years of the first day of the first year that the S corp election is made. (5 years thru the period ending 12/31/13)
2) S corp was never a C corp.
) S corp can demonstrate that the distributed asset was acquired after the S election.
4) S corp can demonstrate that the appreciation occurred after the S election.
5) The net unrealized built in gain has been completely recognized in prior to tax years.
How is the tax on built in gains calculated?
Built in gains tax is 35% (the highest corp tax rate) times the lesser of the following:
1) Net recognized built in gains for current year
2) Taxable income of S corp as if the corp were a C corp.
When are S corps taxed on passive investment income?
Taxed at 35% on the lesser of:
- net income or
- excess passive investment income
if the 2 conditions are met:
- S corp accumulated C corp E&P and
- passive investment income exceeds 25% of gross receipts
Note: passive investment income includes: royalties, dividends, interest, rents, annuities, but NOT gains on sales of securities
How are K-1 Losses from an S Corp for individuals treated?
- Losses are limited to the s/h's adjusted basis in S corp stock plus direct s/h loans to the corp.
- Shareholder guarantees DO NOT increase basis (unlike partnerships).
- Any losses disallowed may be carried forward indefinitely and will be deductible as the s/h's basis is increased.
- Losses are additionally limited to an S Corp s/h's at-risk amount in the corp.
- nonrecourse loans (loan where s/h is not personally liable) is not considered in the at-risk amount
- nonrecourse loans (loan where s/h is not personally liable) is not considered in the at-risk amount
What items must be separately listed on an S corp tax return (Schedule K)?
Shareholder is taxed when earned, not when distributed/received.
1) Ordinary income (not subject to FICA)
2) Rental income/loss
3) Porfolio income (including interest, dividends, royalties, and all capital gains [losses])
4) Section 1231 gains and losses
5) Charitable contributions
6) Section 179 deduction (Expense deduction for recovery property)
8) Foreign income taxes
9) Tax exempt interest
10) Percentage depletion
11) Unrecaptured Section 1250 income
12) Gain/Loss on Sale of Collectibles
Give formula for Shareholder Basis in S Corp Stock
Generally the same rules as p-ships
+ Income Items (separately and non-separately stated items) *
+ Additional s/h investments in Corp Stock
( Distribution to Shareholders )
( Loss or Expense items )
*includes tax free income
A S corp shareholder is permitted to deduct (on a personal income tax return) the pro-rata share of the S corp loss subject to what limitation?
+ Direct s/h Loans
When does a shareholder contributing property in exchange for C corp common stock have no gain or loss recognized?
The following 2 conditions must be met:
1) Transferors/shareholders own at least 80% of the voting and nonvoting stock
2) Boot (cash or other property) or cancellation of debt is not involved
Generally, what is the basis of common stock received by the shareholder?
1) Cash - amount contributed
2) Property contributed - adjusted basis (NBV)
3) Services - fair value. Plus any gain recognized by the shareholder.
For corps, are bad debts deductible?
For taxpayers in general (including corps), bad debts are deductible to the extent the bad debts were previously included in income. The charge off method (not allowance method) must be used.
How are charitable contributions treated by corps?
The max deduction is up to 10% of taxable income before the deduction of the following deductions: the charitable contribution, the dividends received deduction, any NOL carryback, any capital loss carryback, and the US production activities deduction.
When are life insurace premiums deductible?
Policies on key employees are not deductible when the corp is directly or indirectly the beneficiary. If insured employees names the beneficiaries, premiums are deductible as an employee benefit.
Note: If life insurance coverage exceeds $50,000, payment of premiums may represent income to the employees.
Identify the corp tax treatment of capital gains/losses
1) Capital gains are taxed the same as ordinary corp income.
2) Corp may not deduct any capital losses from ordinary income.
3) Capital losses are deductible to the extent of capital gains.
4) Net capital losses may be carried back 3 years and forward 5 years as a short term capital loss.
State the general NOL carryforward/carryback rules.
Net operating losses can be carried back 2 years and or forward 20 years.
Must file form 1120X (Amended Corp Inc Tax Return) within 3 years of the due date of the return for the loss year.
May file Form 1138, Corp Application for Tentative Refund, by the end fo the tax year immediately following the loss year
Note: 1) No Charitable Contrib Deduct is allowed when calculating NOL and
2) The DRD is allowed to be deducted before calculating NOL deduction
Name some nondeductible trade or business expenses.
1) Bad debts, allowance method (only specific write off method is deductible)
2) Illegal activities (bribes, penalties)
3) Business gifts exceeding $25 per person per year
4) Business meals and entertainment are limited to 50% of total expenses
5) Political contributions
6) Club dues
7) Executive compensation in excess of $1 million per year for each of top five executives in publicly held corp, unless compensation is performance based
Identfiy the three levels of the dividends received deduction.
1) 70%: Less than 20% ownership; 70% of dividends received are deducted from taxable income up to a limit of 70% of taxable income.
2) 80%: 20%-<80% ownership; can claim 80% dividends received are deducted from taxable income up to a limit of 80% of taxable income.
3) 100% Affiliated companies (80% or more common ownership).
DRD is the lesser of:
- 70% or 80% of the dividends received
- 70% or 80% of taxable income computed without regard to the DRD, any NOL deduction, capital loss carryback, or domestic production activities deduction
However, the DRD limitation does not apply if, after taking into account the full DRD, the result is a NOL.
Good Example on page R3-25
What are the reqs to file a consolidated return?
- All corps in group:
1) Must have been members of an affiliated group at some time during the tax year.
2) Each member must file a consent (act of filing a consolidated return is considered consent).
- Affiliated group:
1) Common parent owns 80% or more of the voting power of all outstanding stock and 80% or more of the value of all outstanding stock of each corp.
Identify the advantages of filing a consolidated return.
1) Capital losses of one corp offset capital gains of another corp
2) Operating losses of one corp offset profits of another corp
3) Elimination of tax on intercompany transactions
4) Use of excess foreign tax credit by corp group
5) Designation of parent company as agent for the group
Describe the corporate AMT.
1) AMT rate of 20% on AMTI
2) Exemption is $40,000 less 25% x (AMTI - $150,000)
3) Exemption is completely eliminated at AMTI of $310,000
4) Calculated similarly to individual AMT
Name some corp AMT preferences.
1) Percentage depletion
2) Private activity bonds (but not if issued in 2009 or 2010)
3) Pre-1987 ACRS depreciation
What is the adjusted current earnings (ACE) adjustment? MIND
75% of the difference (pos or neg) between ACE and AMTI before this adjustment and alternative tax NOL deduction.
1) M - Municipal bond interest income other than interest income from private activity bonds issued after 1986
2) I - Increase in life insurance cash surrender value
3) N - Non-SDL after 1989 vs. ADS
4) D - Dividends received deduction (less than 20% ownership/70% deduction)
What is the accumulated earnings tax?
The accumulated earnings tax is a tax on accumulated earnings beyond the reasonable needs of the business.
Corps can accumulate up to $250,000 or an amount reasonable to the needs of the business without penalty.
For personal service corps, the amount is up to $150,000.
The tax is a flat 20% of the unreasonable accumulated earnings.
Define a personal holding company.
A personal holding company must meet both of the following:
1) At any time during the last half of the tax year, more than 50% of the value of corps outstanding stock is owned by five or fewer individuals
2) At least 60% of the corps adjusted ordinary gross income consists of personal holding company income (dividends, rents, royalties, annuities, interest, adjusted rental income, and certain other investment income sources). (NIRD).
The penalty tax is 20% of the undistributed personal holding company income.
The company is given a 90 day grace period to pay a deficiency dividend. (not sure if 90 day grace period applies to 2014)?
Must file Schedule 1120 PH along with Form 1120
What is a personal service corp? What is the tax rate?
A personal service corp is a corp primarily involved in the performance of one of the following fields: Accounting, law, consulting, engineering, architecture, health and actuarial science.
The tax rate is a flat 35%.
Give the Accumulated E&P Formula
Accum. E&P as of the beginning of the year
+/- Current E&P for the tax yr less any distrib.s deemed from current E&P
(Distributions from Accum. E&P)
Accumulated E&P as of the end of the year*
*carry forward to the tax year after the current year
What are the tax implications of a tax free reorganization?
A tax free reorganization is a nontaxable transaction except to the extent of boot received.
Other than for a 501(c)(1) corp, which is created through an act of Congress, what are the general reqs for a corp to obtain tax exempt status?
1) Make a written application for exempt status
2) Be approved by the IRS
3) Become incorporated under the standard procedures
3) Issue capital stock
4) Include in the Articles of Organization the fact that the articles limit the purpose of the entity to the charitable/exempt purpose
What are the general reqs for 501(c)(3) corp to maintain its tax exempt status?
1) No part of the net earnings may insure to the benefit of any private foundation or individual.
2) No substantial part of the activities may be nonexempt activities (propaganda or influencing legislation).
3) The organization may not directly participate or intervene in any political campaign. Note: The organization must also file the required annual info tax forms (if applicable). If the organization fails to file for three consecutive years, the tax exempt status will be revoked.
When does a private foundation terminate involuntarily?
1) It becomes a public charity (it cant be both)
2) It commits repeated violations or a willful and flagrant violation of any of the private foundation provisions.
What are the categories of private foundations that are excluded from the provisions of Section 509 (ie they are deemed "public organizations")?
1) Max (50%-type) charitable donees
2) Broadly publicly supported organizations receiving more than one third of their annual support from members of the public and less than one third from investment income and unrelated business income
3) Supporting organizations
4) Public safety testing organizations
What is the definition of "unrelated business income" (UBI)?
UBI is gross income from any unrelated trade or business "regularly" carried on, minus business deductions connect therewith.
1) Derived from an activity that constitutes a trade or business
2) Regularly carried on
3) Not substantially related to the organizations tax exempt purposes.
How is UBI taxed for an exempt organization?
Although an organization may have tax exempt status, the organization may become suject ot regular corp income tax on its unrelated business income (UBI).
1) The organization is allowed a $1,000 specific deduction from UBI; thus only UBI in excess of $1,000 is subject to tax.
2) Further, there are other types of income that are specifically excluded from tax.
What are some items of income ( other than the $1,000 that is specifically excluded from tax) that are excluded from tax for the exempt organization?
1) Royalties, dividends, interest, and most annuities
2) Rents from real property and rents from personal property leased with real property (subject to limitations), other than income from debt financed property
3) Gains and losses from the sale/exchange of property not held primarily for sale to customers
4) Income from research of a college or hospital
5) Income from labor unions used to establish exclusive use facilities
6) Activities limited to exempt organizations by state law
7) Income from the exchange or rental of membership lists
What are the three types of exempt organizations that do not have an annual filing requirement of an information return with the IRS?
1) Churches and exclusively religious activities of a religious order or internally supported auxilliaries
2) Certain organizations (educational organizations, religious organizations, public type charities, fraternal organizations, and those organizaed to prevent cruelty to children or animals) that normally have less than $5,000 in annual gross receipts
3) Organizations that normally have less than $50,000 in annual gross receipts.