S Corp Flashcards
S Corp
Small closely held corporations that qualify may elect to be taxed as an S corporation. Eligible shareholders must be an individual, estate, or trust. Individual shareholders may not be nonresident aliens. There cannot be more than 100 shareholders and there can only be one class of voting stock.
S Corp election
If the election is made during the preceding year or any time before the 15th day of the third month (3/15 for a calendar year taxpayer), the election is effective as of the beginning of the year.
S Corp Shareholders
New shareholders do not need to consent to the S election unless the shareholder owns more than 50 percent of the stock.
S Corp Tax Situations
Like partnerships, S corporations are generally not subject to taxation. S corporation income flows through to its shareholders, who include these amounts on their individual returns.
Tax Situations
LIFO Recapture
C corporations that elect S status must include in taxable income for the last C corporation year the excess of inventory computed under FIFO over LIFO.
Tax Situations
Built-in Gains
(unrealized built-in gains)—When an S corporation used to be a C corporation and, upon conversion to an S corporation, the FMV of the corporate assets exceeds the adjusted basis. Any sale of such assets over a 10-year period will result in that gain being taxed at the corporate level.
Tax Situations
Tax on Passive Investment Income
An S corporation is subject to an income tax at the highest corporate rate on the lesser of net income or excess passive investment income if the following two tests are met: the S corporation has accumulated C corporation E&P and passive investment income (dividends, interest, etc.) exceeds 25 percent of gross receipts.
S Corp
Stated Items
Like partnerships, S corporations report separately and non-separately stated items:
non-separately = ordinary income. Separately stated include capital gain/losses, interest, rental income, etc.
Shareholder basis:
B Initial basis
A + Income (separately/non separately stated, even nontaxable) + Additional shareholder investments
S - Distributions to shareholders - Losses or expenses (even nondeductible)
E Ending basis
Review Form K-1
This is the form given to shareholders to report to them and to the IRS the individuals’ portion of the S corporation income and expenses.
S Corp Election
If the shareholders of an S corporation revoke their election, a new election cannot be made for five years without the consent of the IRS. S corporation status terminates when there is a voluntary revocation, the corporation fails to meet the eligibility requirements (e.g., a nonresident alien shareholder), or more than 25 percent of the corporation’s receipts come from passive investment income for three consecutive years and the S corporation has C corporation E&P.
