Chapter 3 Section 2: Small Business Corporations (S Corps) Flashcards
What is the general effect of S Corps?
All earnings and losses are passed through to the shareholders
Who are eligible shareholders?
Must be an individual, estate, or trust
May not be a nonresident alien
Can’t be a corporation or partnership
What is the shareholder limit?
100
Is preferred stock allowed?
No, but you can have differences in common stock voting rights
When does the election take effect?
After all shareholders consent to a valid election
By March 15, it is retroactive to the beginning of the year
What can S Corps use as tax years?
12/31 unless you have a good reason for otherwise
What are the three principal taxes on S Corps?
LIFO recapture
Built-in gains tax
Tax on passive investment income
Explain the built-in gains tax
Tax on sale of assets when these both occur:
- C Corp elects S Corp status
- FMV of corporate assets exceeds adjusted basis of assets on election date
How can you avoid the built-in gains tax?
When any of these occur:
- S Corp was never a C Corp
- Sale does not occur within 10 years of day the election was made
- S Corp can demonstrate that appreciation occurred after the election
Where do income or losses of the S Corp go?
To the shareholder on a K-1
Are fringe benefits deductible?
Yes, for non-shareholder employees
No, for shareholders owning over 2%, unless it includes the benefit in W-2 income
What is the Accumulated Adjustments Account?
Used to compute the tax effects of distributions paid to shareholders of an S Corp that has accumulated E and P since inception
What is the loss limitation for S Corp shareholders?
Basis + Direct Shareholder Loans - Distributions
Are distributions from an S Corp taxable to shareholders?
Usually not, unless it’s in excess of the basis of the stock. Then it would be a capital gain.
What if the distributions from an S Corp are using old C Corp E and P?
It’s taxed as a dividend
