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Flashcards in S Corporation Deck (20):

built in tax

the amount of the tax imposed shall be computed by applying the highest rate of tax specified for corporations to the net recognized built-in gain of the S corporation for the taxable year. Thus, the tax rate for an S corporation that pays tax on built-in gains is the highest corporate income tax rate.



The consent to form an S corporation must be given by all shareholders.


losses and loans

The loss reduces the shareholder's stock basis first. The remaining loss ($39,000 − $30,000) of $9,000 is deducted from the loan basis.



make sure your using percentage allocation for the loss and also note when the interest was sold so you have to prorate based on number of days out of the year


SCORP distributions Question #101356

S corporation distributions are (1) tax-free to the extent of the accumulated adjustments account (previously taxed to Paul), (2) taxable to the extent of accumulated earnings and profits (C corporation earnings), (3) any remaining distributions are a return of capital ( Reduce basis)


shareholder basis plus deductibility of losses

Loans to an S corporation increase a shareholder’s basis, and repayments of that loan reduce basis. The taxpayer had a basis of $35,000 ($25,000 + $13,000 − $3,000) at year-end; therefore, the maximum amount of the loss that can be deducted is $35,000, since the taxpayer’s basis cannot go below $0. In other words, the deductibility of losses is limited to the shareholder’s basis in stock plus loans to the company.


Built in tax

Built-in gains tax was enacted to prevent C corporations planning on selling or distributing property from electing S corporation status before the sale or distribution. Electing S status would otherwise avoid the double taxation associated with C corporations.


AAA acount

Generally, income items such as interest and dividends will increase the AAA (accumulated adjustments account) of an S corporation. Capital contributions and distributions have no effect on the AAA account, and charitable contributions would decrease the AAA account.



Loss on stock redemption is not recognized until liquidation is complete.


prorata share Question #101907

tems of income and/or loss for an S corporation are passed through to the shareholders based on their pro rata share of each separately or nonseparately stated item, whether distributed or not. Kane will report $56,900 of nonseparately stated income from Manning Corporation for Year 0, computed as follows:


S Corp

Having two classes of stock will prevent a corporation from qualifying as an S corporation. A single class of stock is allowed to have different voting rights for different shareholders.

An estate and a grantor trust are allowed as shareholders of an S corporation.


S Corp general info

S corporations are limited to 100 shareholders and only one class of stock can be issued and outstanding. The eligible shareholders can only be individuals, estates, charitable organizations, and certain trusts. It is logical that partnerships cannot be shareholders because, like S corporations, most items of income and expense flow through to the shareholders, and if you look past the partnership to the partners, it would be very easy to go beyond 100 shareholders for S corporation status. Also, nonresident aliens may not be shareholders.


debt basis only Question #101354

Although debt provides basis for the purpose of deducting losses, it is not considered basis for purposes of distributions. The $3,000 will be treated as a capital gain because Clyde had no stock basis. Had the $3,000 been treated as a debt repayment, instead of as a distribution, Clyde would have recognized no income.


taxable income for an S Corp

Taxable income for the S corporation is determined in almost the same way as for a partnership. Allowable deductions are similar to those available to individuals, with the following exceptions:

a. Itemized deductions
b. Personal exemptions
c. Net operating loss deductions
d. Charitable contributions
e. Foreign taxes
f. Oil and gas depletion


S corp ownership

Each shareholder must include on the personal tax return the share of the corporation's income or loss and special items from the corporate tax year that has ended with or within the personal tax year. Where ownership has changed during the year, each owner must recognize a pro rata share of the income or loss allocated on a daily basis.

Income is not allocated based on the ownership percentage at either the beginning or the end of the S corporation year. Income is not allocated based on the average of the beginning and ending ownership percentages.


S corp terminates

Whenever an S corporation terminates its status (and becomes a C corporation), a daily allocation of the income (or loss) must be made.


Scorp elections

Since HDF did not file for S corporation status by March 15, year 2, their S corporation status will become effective the first day of the following year, or January 1, year 3


S corp

In fact, the basis is increased by all taxable income and tax-exempt income and is decreased by all deductible losses/expenses and nondeductible losses/expenses.


S-corp vs C-corp

Shareholders in C corporation stock report as income their percentage ownership multiplied by the dividends that are distributed. It does not matter how much taxable income the C corporation reports.

Shareholders in an S corporation report as income their percentage ownership multiplied by the taxable income and separately stated items for the S corporation. There are no separately stated items, so Carson would report $160,000 ($400,000 × 0.40) as his share of the S corporation's taxable income.


built in gain tax

The maximum corporate rate is used to prevent tax avoidance by converting C corporation income to S corporation income. Unexpired benefits of the C corporation are deducted (NOLs, capital losses, AMT credits, and business credit carryforwards).