S-Corp Taxation

Question 1

Can start-up costs be written off over 180 months with an immediate deduction for:
Partnerships?
S-corps?
C-corps?

Answer 1

YES

Question 2

DO both capital gains and municipal bonds increase partner basis?

Answer 2

YES

Question 3

What is the name of the tax return for an S-Corp? When is it due?

Answer 3

1120S

March 15th

Question 4

S-Corp: How are salaries to partners handled?

Answer 4

Officer’s salaries may be deducted from the business

Question 5

Does an S-Corp pay taxes?

Answer 5

No, the business does not pay taxes. Income/Loss flows through to the stockholders.

Question 6

What is the minimum number of stockholders in an S-Corp?

Answer 6

1

Question 7

What schedule does pass-through income get reported to partners on?

Where does it get reported on the 1040?

Answer 7

Schedule K-1

1040, Schedule 1- Additional Income

Interest/Dividends - Schedule B

Capital Gains/Losses - Schedule D

Question 8

What happens to income even if it is not distributed to stockholders in regards to tax?

Answer 8

Stockholders still pay income tax in the year earned, even if not distributed.

Question 9

S-Corp formation return?

Answer 9

Form 2553

Question 10

S-corp timely election means

Answer 10

First become a C-corp, then make a timely election within 75 days (2.5 months) by filing Form 2553 to become a S-corp. Election reverts back to first day of formation as long as it is timely.

Question 11

What happens if you do not make a timely election to be considered an S-corp?

Answer 11

Considered a C-corp for the full first year. S-Corp starting Jan 1, Year 2.

Question 12

Once an S-corp is established, can it be lost?

Answer 12

Yes, it is possible to lose S-corp status and revert back to a C-corp (and thus get hit with double taxation)

Question 13

What would happen if an S-corp has 101 shareholders?

Answer 13

Revert to a C-corp

Question 14

Dad, son, daughter - how many shareholders

Answer 14

1

Question 15

How many classes of stock are allowed in an S-corp?

Answer 15

Only 1 class

Preferred stock = lose S-corp status

Question 16

Can estates, trusts, bankruptcy estates be shareholders of an S-corp?

Answer 16

YES

Question 17

How are debts handled differently between S-corps and partner

Answer 17

If a partnership borrows money, the partner are automatically liable for the partnership debts (and thus increase basis).

If S-corp borrow money, do NOT increase the basis of the S-corp shareholder for the outside loan from a bank.

Question 18

In an S-corp, does tax-exempt interest increase the basis of a stockholder?

Answer 18

YES

ALL income, whether taxable or not increase the basis of an S corp stockholder.

Question 19

What is rule IRC Section 311?

Answer 19

Controls the taxability of corporate distributions.

An S-corp (and C corp) recognize a gain on any distribution of appreciated property (a property dividend) in the same manner as if the asset had been sold to the shareholder at its fair market value.

Question 20

What happens if a S-corp sells any interest in the S-corp to a C-corp?

Answer 20

The S-Corp would lose its S-corp status

Question 21

If an S-corp loses their status on April 1, how are they taxed in that year?

Answer 21

S-corp from Jan 1 - March 31.

C-corp from April 1 - Dec 31.

Question 22

Does election or revocation of S-corp status require unanimous consent of shareholders?

Answer 22

NO, a revocation of S election may be filed by shareholders owning more than 50% of an S-corp’s outstanding voting stock.

Question 23

Does an S-corp ever pay tax?

Answer 23

In a few rare exceptions:

-S-corp sells property that contained a BUILT-IN GAIN at the time of the S-election

(if S-corp from inception, no worries about a built-in gains tax)

-If the S-corp has PASSIVE INVESTMENT INCOME (dividends, interest, royalties, rents) and it exceeds 25% of gross receipts and the S-corp has C-corp earnings and profits (from its earlier days). The tax on the passive investment income is 21%.

Question 24

What happens if more than 25% of the S-corp’s gross receipts come from passive investment income for 3 consecutive years AND the S-Corp has C-corp earnings and profits (from its days as a C-corp) for each of those 3 years?

Answer 24

S-Corp status would be terminated as of the beginning of the 4th year

Question 25

If X owned 100% of the S-Corp on 1/1 but SOLD 20% of the shares on 2/28 which is the 59th day of the year. What is the income for Shareholder X?

Answer 25

100% x 59/365 = $1,616 80% x 306/365 = $6,707 =$8,323 of income

Question 26

In what order are S-Corp earnings and profits distributed?

Answer 26

- Tax-free to the extent AAA (Accumulated Adjustments Account, taxed once per K-1) - Ordinary Dividend to the extent of Accumulated Earnings and profits from days as a C-Corp - Tax free to the extent of basis in the the stock - Excess is treated as a Capital Gain

Question 27

What does S-corp shareholder's limited liability mean?

Answer 27

It means that they can't lose more than their investment.

Question 28

Does a bank loan guaranteed by an S-corp shareholder increase basis?

Answer 28

No, only loans made by the shareholder to the corporation increase basis.

Question 29

What happens when an LLC distributes appreciated property to a shareholder?

Answer 29

Appreciated assets can be distributed tax-free, just like in a partnership.

Question 30

Accumulated Adjustments Account (AAA) reports what?

Answer 30

Reports undistributed earnings of an S-corp. These earnings have been previously taxed to the S-corp shareholders.

Question 31

Conversion from C-Corp to S-Corp: Requires consent of how many shareholders?

Answer 31

Unanimous consent

Question 32

Conversion from C-Corp to S-Corp: If the former C-corp waits ___ years before distributing appreciated assets, then no built-in gains tax would be applied on the built-in gain in the current year.

Answer 32

5 years

Question 33

How much passive income must a S-corp have to lose their S-corp status?

Answer 33

This rule doesn't apply if they were an S-corp from inception. The 25% rule only applies if they converted from a C-corp to an S-corp.

Question 34

Are tax exempt interest and income included in AAA?

Answer 34

NO Because it only includes amounts that have been previously taxed to shareholders

Question 35

If an S-corp shareholder owns 2% or more of the stock, how are health insurance premiums paid by the S-corp handled?

Answer 35

Included in the shareholder's gross income.

Question 36

Premiums paid on key officers (company is beneficiary) ARE or ARE NOT deducted to arrive at S-corp ordinary business income.

Answer 36

ARE NOT deducted. This is because there is no tax due on proceeds from the policy when the officer dies. They ARE a separately stated item that reduces shareholder basis.

Question 37

S-Corp distribution partially from earnings from days as a C-Corp

Answer 37

1: AAA - tax free, subtract, reduces basis 2: AEP - dividend 3: Analyze leftover distribution vs. basis - CAPITAL GAIN