R5 - S Corps

Question 1

What are some commonly separately state items (not included in ordinary income)

Answer 1

Rental real estate income or loss
Interest Income
Dividend Income
Royalties
Charitable contributions
Section 179
Net short/long term capital G/L
Net section 1231 G/L

Question 2

Can a shareholder in an S Corp be an employee and receive a salary?

Answer 2

Yes, that salary won’t be separately stated

Question 3

Does tax-exempt interest increase shareholder basis?

Answer 3

Yes

Note: taxable interest income increases basis as well

Question 4

For which entity is the owner’s basis increased/decreased by the owners share of P/L and NOT affected by the entity’s bank loan increases and decreases?

Answer 4

S Corporation

Question 5

Deductible fringe benefits

Answer 5

For non-shareholder employees and those employees owning 2% or less of the S Corporation are deductible by the S Corp in calculating ordinary income

Question 6

Nondeductible Fringe benefits

Answer 6

Cost of fringe benefits for shareholders owning over 2% is not deductible by the S Corp unless included in the employee/shareholders W2 income

Note: must include in shareholders income and report in K1

Question 7

What is the calculation for a shareholders basis in an S Corp (order matters!!)

Answer 7

Initial basis (contribution of cash, adjusted basis of property, fmv or services)
+ income items
+ additional contributions
- distributions to shareholders
- loss/deduction items

Note: Include all separately stated and tax free items

Note: S Corp non recourse debt does NOT increase shareholder (at risk) basis

Question 8

For a S Corp shareholder to deduct a loss, the shareholder must clear what four hurdles

Answer 8

Tax basis limitation
At risk limitation
PAL limitation
Excess business loss limitation

Question 9

A suspended loss due to insufficient tax basis can be

Answer 9

carried forward indefinitely

Note: suspended losses remaining when the shareholder disposes of his or her S Corp stock are LOST

Question 10

What is debt basis

Answer 10

Any direct shareholder loans made to the S Corp

Question 11

What is Tax Basis

Answer 11

Stock Basis + Debt Basis

Question 12

At risk basis

Answer 12

does not include non recourse loans where the shareholder is not personally liable

Question 13

Which basis is reinstated first?

Answer 13

Debt basis then stock basis

Question 14

Which limitations of pass through losses are applied at which level?

Answer 14

The tax basis and at risk limitations are applied at the entity level.

The PAL and excess business loss limitation are applied at the individual tax levek

Question 15

Accumulated Adjustments Account (AAA)

Answer 15

the accumulated earnings and profits during the years the corporation is an S Corporation

Note: distributions may not reduce AAA below zero. however AAA may be negative due to S Corp losses and deductions

Question 16

Increases to AAA

Answer 16

ordinary business income
separately stated income and gain items (other than tax exempt income)

Question 17

Decreases to AAA

Answer 17

ordinary business losses
separately stated losses and deductions
nondeductible expenses (other than expenses related to tax exempt income)
distributions (may not reduce AAA below zero)

Question 18

Other Adjustments Account (OAA)

Answer 18

account that is designated to keep a cumulative record of items that affect S Corp shareholders stock basis but do not affect AAA

Question 19

What is included in OAA account

Answer 19

tax exempt interest
tax exempt life insurance proceeds and related nondeductible premiums
federal taxes paid or accrued in an S Corp year that relate to C Corp years

Question 20

Distributions to shareholders are generally

Answer 20

not taxable if the entity has always been an S Corp

Question 21

Distributions (without C Corp E&P)

Answer 21

ROC to the extent of stock basis
Capital gain to the extent in excess of stock basis

Question 22

Distributions (with C Corp E&P)

Answer 22

AAA - reduces basis in stock
Extent of C Corp E&P - dividend income
OAA - reduces basis in stock
Extent of stock basis - ROC
In excess of stock basis - capital gain

Question 23

An S corp will terminate as a result of

Answer 23

shareholders holding more than 50% of stock (voting + nonvoting) consent to a voluntary revocation - terminate by 3/15

corp fails to meet any of the qualifications for S status (corp/pship owner, foreign owner, more than 100 owners) - immediate termination

excess passive investment income - more than 25% of the corps gross receipts are from passive investment income for 3 consecutive years (but only if the corporation has prior C Corp E&P) - terminate at beginning of 4th year

Question 24

When can you re-elect S status after termination?

Answer 24

wait 5 years or ask ask IRS permission

Question 25

Contributions to an S Corp are nontaxable if it is:

Answer 25

a contribution of property (not services, this is taxable) solely in exchange for stock after the transfer, the shareholder or group has control of the corporation through 80% stock ownership

Question 26

Requirements to qualify as an S Corp

Answer 26

Qualified Corp (must be domestic) Eligible shareholders (US individuals, estates, or certain types of trust, qualified retirement plans and 501c3 orgs, NO nonresident aliens - must be a citizen or resident) Shareholder limit (no more than 100) - family members may elect to be frayed as one shareholder One class of stock- differences in voting rights are allowed

Question 27

LIFO recapture tax

Answer 27

C Corps that elect S status must include in taxable income for the last C Corp year the excess of inventory computed using the FIFO method over the inventory computed using the LIFO method (S Corp will pay a tax)

Question 28

Built in Gains Tax results when

Answer 28

A C Corp elects S Corp status and the FMV of the corporate assets exceeds the adjusted basis of corporate assets on the election date (appreciated assets). When these assets are later disposed of, BIG tax may have to be paid

Question 29

Exemptions from BIG recognition

Answer 29

The S Corp was never a C Corp The sale or transfer does not occur within 5 years of the first day that the S election is effective The appreciation occurred after S election The asset was acquired after S election Total unrealized BIG has been completely recognized in prior years

Question 30

Calculation of Tax for S Corp

Answer 30

21% of the lesser of: recognized BIG for the current year taxable income of the S Corp if it were a C Corp

Question 31

Tax on passive investment income

Answer 31

taxed (21%) on the lesser of net income or excess passive investment income if - S Corp has C Corp E&P and passive investment income exceeds 25% of total gross receipts

Question 32

A single member LLC is

Answer 32

a disregarded entity for federal income tax purposes and is therefore treated as an individual

Question 33

Consequences to an S Corp as a result of a liquidation

Answer 33

FMV of assets distributed - Basis in assets

Question 34

Consequences to shareholders as a result of a liquidation

Answer 34

Cash received + FMV of property received - liabilities assumed = Amount realized - Basis in stock = Taxable G/L

Question 35

What is the shareholders basis in any property distributed, FMV or adjusted basis?

Answer 35

FMV