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Flashcards in R3- Pt2-5 Deck (42)
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How is an S-Corporation election made?

Election for S Corp status must be made by 3/15 and counts as being an S Corp since the beginning of the year

To make election, 100% of the shareholders must consent

- Consent of New Shareholders - Not Req.


How is an S-Corporation terminated?

- 50% of the shareholders must consent

- Fails to meet any or all eligibility requirements

- More then 25% of Gross Receipts come from Passive Income for 3 consecutive years

- Had C-Corp E&P at end of each year

- Effective immediately


What items are not included in calculating an S-Corporation's ordinary income?

These items are included on Schedule K, not in ordinary income:

Foreign Taxes paid deduction
No Investment Interest expense
Section 179 Deduction
1231 Gain or Loss
Charitable Contributions
Portfolio Income (dividends or interest)


How is S-Corporation shareholder basis calculated?

Beginning Basis
+Share of Income Items (including non-taxable income!)
+ Additional shareholder investments
-Distributions (cash or property)
-Non-deductible expenses
-Ordinary Losses (but don't take income below zero)
= Ending basis


What is the formula for an S-Corp Built-in Gains Tax?

FMV of Assets @ S-Corp Election Date
- Adjust. Basis of Assets
= Built-in Gain
x 35% Corporate Rate


What are the requirements for holding S-Corporation status?

- Domestic only

- Up to 100 shareholders allowed

- Only one class of stock allowed

- Calendar tax year only


What are the Eligible Shareholders for a S-Corporation

- Only individuals, estates and trusts can be shareholders

- No Foreign Shareholders

- Corporations & Partnerships aren't Eligible


Built-in Gains resulted when 2 conditions occur:

- A C-Corp elects S-Corp Status
- The FMV of the Corporate assets exceeds the Adjusted Basis of the Corporate Assets on the Election Date


S-Corporations are Exempt from a tax on 'built-in gains' under any circumstances:

- The S-Corp was NEVER a C-Corp

- Sale or transfer doesn't occur within 10yrs

- Demonstrate the appreciation occurred AFTER the S Election


What is reported separately & Non-separately stated items in Net Income?

- Separately: Income & Deductions

- Non-Separately: Business Income or loss


How is Pass-through income allocated to Shareholders?

- On a Per-Share, Per-Day Basis


Pass-Through Losses are Limited to?

- A shareholder's Adjusted Basis in S-Corp stock

- Plus direct shareholder loans to the Corp.

-Shareholder Guarantees do not increase Basis


Fringe Benefits are deductible for?

- Non-Shareholder Employees


Fringe Benefits are Non-deductible for?

- Cost of Fringe Benefits for Shareholders owning over 2%


Accumulated Adjustments Accounts Computes:

- Tax Effects of distributions paid to shareholders of a S-Corp that has Accumulated E&P since inception


What is the Tax result & Treatment for the 1st distribution to Shareholders NO C-Corp E&P?

-Distribution is to extent of basis in stock

-Not Subject to Tax, reduces basis in stock

- Treatment is Return of Capital


What is the Tax result & Treatment for the 2nd distribution to Shareholders wit NO C-Corp E&P?

- Distribution in Excess of basis of stock

- Taxed as long-term Capital Gain

- Treatment: Capital Gain Distribution


What is the Loss Limitation Calc. for a Shareholder to deduct on their personal Tax Return?

- Pro Rata Share in S-Corp

+ Direct shareholder Loans
- Distributions
= Loss Limitation


What is the Tax result & Treatment for the 1st distribution to Shareholders WITH C-Corp E&P?

- To Extent of Acc. Adjustments Account

- Not subject to tax, Reduces basis in Stock

- Treatment: S-Corp Profits - Already taxed


What is the Tax result & Treatment for the 2nd distribution to Shareholders WITH C-Corp E&P?

- To Extent of C-Corp E&P

- Taxed as dividend, Does NOT reduce basis in stock

- Treatment: Old C-Corp Taxable Dividend


What is the Tax result & Treatment for the 3rd distribution to Shareholders WITH C-Corp E&P?

- To Extent of Basis of Stock

- Not subject to Tax, Reduces basis in stock

- Treatment: Return of Capital


What is the Tax result & Treatment for the 4th distribution to Shareholders WITH C-Corp E&P?

- In EXCESS of Basis of stock

- Taxed as Long-term Capital Gain

- Capital Gain Distribution


When can a S-Corporation Re-Elect?

- 5 years after termination

- Unless IRS consents


To be Exempt, Organizations not included in 'Section 501(c)(1) Must:

- Written Application & Approval by the IRS

- Become Incorporated
- Issue Capital Stock


An Organization can lose 'Exempt Status" if:

- Engage in activities to influence Legislation

- Participate or intervene in Political Campaigns


What Organizations are EXCLUDED from Section 509 Private Foundations?

- Max. 50% Charitable deduction donees

- Receiving more then 1/3 of their annual support from members

- Supporting organizations

- Public Safety testing Organizations


What is the Required Return for Private Organizations?

- Form 990-PF

- Discloses substantial contributors & amounts of contributions received.


Private Foundations will Involuntary terminate when?

They become Public Charities


Private Foundations will Voluntary terminate when?

- Achieved by notifying the IRS

- Status is not Permanent


Unrelated Business Income is?

- Derived from an activity that constitutes a trade/business
- Regularly carried on
- Not Substantially related to the Organization's tax-exempt purposes


Taxation Rules & Deduction Amount for Unrelated Business Income?

- Comply with code provisions regarding installment payments of estimated payments

- $1,000 deduction, excess of is subject to tax


The Annual information Return for Unrelated Business Income states?

- Gross income, receipts, contributions, disbursements, etc

- Required of most organizations exempt from tax &
- Open to public inspection


What are the EXCEPTIONS of Unrelated Business Income?

- $50,000 or less gross receipts
- Churches
- High School- Religious
- Religious Orders
- Internal Support Auxiliary
- Societies- Missionary related
- Tax Exempt- Organized by Congress


What is a Controlled Taxpayer?

- Any one or two taxpayers owned or controlled directly or indirectly by the same interests
- Includes a taxpayer that owns or controls the other taxpayers


What is a Controlled Transaction (Transfer) ?

- Any transaction or transfer between 2 or more members of the same group of controlled taxpayers


What is Uncontrolled Comparable?

- The Uncontrolled transaction or Uncontrolled taxpayer that is compared.


What is a Comparable Uncontrolled Price (CUP)?

- Only for Tangible property
Ex- Sales, purchases, leases

- Based upon reference to published market data


What is a Comparable Uncontrolled Transaction (CUT)?

- Only for Intangible property
(Royalty payments)


What are the 3 circumstances in which Federal Law Prohibits State/Local from imposing a Net Income Tax for Interstate commerce?

- Business consists of solicitation of orders for sales of tangible personal property

- Those orders are sent outside the state for acceptance or rejection

- Orders accepted then, filled by shipments from a point outside the state


A Shareholder's basis in the stock of an S Corp is increased by the Shareholder's pro rata share of income from?

- Tax- Exempt Interest
- Taxable Interest


When must a tax exempt organization file a 990-T for Unrelated Business Income?

If a tax exempt organization has more than $1,000 of UBI, it must file a Form 990-T


What are the requirements for a 501(c)3 organization?

Organized and Operated exclusively for exempt purposes

No earnings can benefit an individual or private shareholder

Cant attempt to influence legislation as a major part of its activities

Cant campaign politically