R3 M5 - S Corporation Flashcards
(18 cards)
S Corporation that are former C corporation with undistributed C corporation earning and profits are limited to the amount of passive investment income they can make without terminating their S-election.
The S-election is terminated if the S corporation if the S Corp has a passive investment income greater than 25 % of gross receipts for 3 consecutive years.
Fringe benefits paid by the S corporation are deductible by the S corporation only for non-shareholder employees and those employee-shareholders owning 2 % or less of the S corporation.
If an employee shareholder **owns greater than 2% **of the S corporation, the only way the S corporation can deduct the cost of fringe benefits is if the corporation includes the benefits in the employee shareholders’ W2 income.
S corporation
- Permitted to have no more than 100 shareholders
- Permitted to have only one class of stock
- Resident aliens are eligible to be shareholders of an S corporation.
- Estate
- Qualified retirement plan trust
In order for an S corporation election to be valid, it must be agreed upon, in writing, by all shareholders. If all shareholders do not give their written consent, the election is invalid.
In order to be effective for the current taxable year, the S corporation election must be made by the 15th day of the third month of the taxable year. If the election is made after that date, it becomes effective on the first day of the next taxable year, January 1, Year 4, in this case.
S corporation status can be revoked if shareholders owning more than 50% of the total number of issued and outstanding shares consent. The specific percentage of voting and nonvoting shareholders is not considered, only the total.
S corporation can have C corporation stocks, but a C corporation cannot have an S corporation.
The rule is that an S corporation that terminates cannot reelect S status until the fifth year from the current year.
Chris owns 25 percent, Tracy owns 35 percent, and Sam owns 40 percent of a business that has always been treated as an S corporation for federal income tax purposes. During the current year, $500,000 of taxable income is generated. Who is responsible for claiming the taxable income?
A. The corporation. B. Chris, Tracy, and Sam, according to their profit distribution agreement. C. Chris, Tracy, and Sam, according to their percentage of ownership. D. Chris, Tracy, and Sam equally.
Choice “C” is correct. S corporations flow through income or loss items to the shareholders. A shareholder must include on his or her individual income tax return his or her distributive share of ordinary business income or loss and separately stated pass-through items. Since the business is treated as an S corporation, Chris, Tracy, and Sam are responsible for claiming their respective ownership percentage of taxable income.
Choice “A” is incorrect. In an S corporation, there is no tax at the corporate level. The income and loss items are passed through to the shareholders based on their ownership percentages and taxed on the shareholders’ individual income tax returns.
Choice “B” is incorrect. Only partnerships, and not S corporations, have profit distribution agreements. Therefore, Chris, Tracy, and Sam should report the income based on their distributive share according to their ownership percentages.
Choice “D” is incorrect. Taxable income must be allocated to shareholders in an S corporation based on their respective ownership percentage, rather than equally between the shareholders.
Graphite Corp. has been a calendar year S corporation since its inception on January 2, Year 1. On January 2, Year 4, Smith and Tyler each owned 50 percent of the Graphite stock, in which their respective bases were $12,000 and $9,000. For the year ended December 31, Year 4, Graphite had $80,000 in ordinary business income and $6,000 in tax-exempt income. Graphite made a $53,000 cash distribution to each shareholder on December 31, Year 4. What total amount of income from Graphite is includable in Smith’s Year 4 adjusted gross income?
A. $96,000 B. $93,000 C. $43,000 D. $40,000
Paige, a 25 percent shareholder in an S corporation, had a stock basis of $10,000 at the beginning of the year. The corporation had ordinary income of $200,000 for the year. There were no separately stated items. Paige received wages from the corporation of $25,000 and a distribution of $30,000. What was Paige’s basis in the stock at year-end?
A. $0 B. $5,000 C. $30,000 D. $35,000
Explanation
Choice “C” is correct. Paige is a 25 percent shareholder, so her basis is increased by 25 percent of ordinary income, or $50,000 (25% × $200,000). Basis is decreased by the $30,000 distribution. Wages do not affect basis. Basis is $30,000 ($10,000 + $50,000 – $30,000 = $30,000).
Choices “A”, “B”, and “D” are incorrect, based on the above computation.
Mark and Mary formed MM Inc. as an S corporation. Each contributed $50,000 in exchange for five shares of corporate stock. In addition, MM obtained a $60,000 loan from a local bank that was still outstanding at the end of the year. In MM’s first year of operation, it reported a loss of $20,000 and did not make any distributions to the shareholders. What is Mark’s basis in his MM shares at the beginning of the second year?
A. $40,000 B. $50,000 C. $70,000 D. $100,000
A taxpayer owns 50 percent of the stock of an S corporation and materially participated in the corporation’s activities. At the beginning of the year, the taxpayer had an adjusted basis in the stock of $25,000 and made a loan to the corporation of $13,000. During the year, $3,000 of the loan was repaid, and the taxpayer’s share of the corporation’s loss for the year was $40,000. What is the amount of the loss that may be deducted on the taxpayer’s tax return?
A. $25,000 B. $35,000 C. $38,000 D. $40,000
Donald owns 50 shares of Delta Corp., an S corporation. He is one of 100 unrelated shareholders. Donald sells 10 shares of his Delta stock to his friend, a U.S. citizen who is currently living in Canada.
Row 5: Terminated
S corporation shareholders must be U.S. citizens or residents, but the sale of stock to the existing shareholder’s friend (a non-relative) increases the number of shareholders to 101. S corporations may have no more than 100 shareholders.
Stock basis and debt basis cannot be below zero.
If that is the case and you make income back you reinstate the debt basis and the left over will be for the stock basis.
AAA can never have a negative ending balance if it’s a cash distribution, unless the business losses money. Than your AAA will have a negative balance.
