Term
| 3 corporate characteristics the S corporations retain |
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Definition
- SH not liable for corporate debt
- shares can be freely transferred
- SH can be employees
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Term
| 4 Tax Characteristics of S-Corps |
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Definition
- SH taxed on portion of income or loss (like partnerships) regardless of distributions
- no imposition of corporate AMT, PHC, or accumulated earnings taxes.
- individual tax preferences are allocated to SHs
- adjsted basis of SH stock is adjusted at year end
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Term
| 4 S-Corp distribution rules |
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Definition
- causes SH to recognize gains to extent the VALUE of the distribution exceeds the adjusted basis in the stock (also reduce basis)
- distributed property will take an outside basis of FMV
- distribution of built-in gain or loss property don't have any special implications for contributing shareholder
- distribution of appreciated property causes recognition of gain at the corporate level (will flow throuh to SHs)
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Term
| 2 SH owning 2% or more of S-Corp rules |
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Definition
- is not eligible to benefit from fringe benefit exclusions
- can deduct premiums paid on health insurance policies issued in his/her name as deduction for AGI as long as SH has earned income from S corp that exceeds total of all premiums paid
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Term
| 3 other rules for S-Corps |
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Definition
- no special provision for contributions of property to an S corp (control club rule prevails for non-recognition)
- can elect to amortize organization expenses
- no E&P calculation because all earnings are taxed to SH but a special calculation is necessary to separate previous chapter C status
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Term
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Definition
- foreign corps not eligible
- certain members of affiliated groups, parents of subs, financial institutions, and DISCs are not eligible (some banks are)
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Term
| Can be an S corp even if... |
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Definition
- S corporation may own an 80% or more equity interest in a C Corp
- S corporation may own a qualified subchapter S subsidiary
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Term
| qualified subchapter S subsidiary |
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Definition
| a corporation that meets all requirements for subchapter s status and is owned 100% by a parent S Corp |
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Term
| 3 ineligible SH for S corporations |
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Definition
- noresident aliens
- c corporations
- partnerships
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Term
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Definition
- estates (bankruptcy or testamentary)
- trusts (if grantor or testamentary)
- special stock voting trusts and qualified S trusts (all beneficiaried are qualified and electing SH)
- small business electing trusts and exempt entities
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Term
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Definition
- no more than 100 SHs
- all members of a family and their estates are treated as a single SH
- each beneficiary of a sharholding trust is counted as a separate SH
- co-owners of stock each count as one SH
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Term
| stock requirements for S corporations |
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Definition
- only one class of stock can be outstanding
- stocks that vary in voting rights are okay
- convertible debt doesn't violate unless and until it is converted into a 2nd class
- unissued treasury stock is okay
- SH debt must be evidenced by a written promise that is not contingent or convertible so it doesn't violate
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Term
| 4 S corporation election requirements |
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Definition
- unanimous consent of SHs (current and past SH for current year) is required
- must be made on or beofre 15th day of 3rd month (form 2553)
- if inelegible for current year, still eligible for the next
- jointly owned stock: both spouses must consent
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Term
| 3 termination circumstances for S Corps |
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Definition
- Voluntary termination through a majoirty vote of all SH (voting and non) *(note: if >50% change in ownership, new owners must affirm to conitue S election or else it is terminated)
- involuntary termination through a violation of eligibility requirement (effective on date of violation which causes short S year and short C year)
- involuntary termination due to a violation of the limit on passive investment income for 3 consecutive years (effective on first day of 4th consecutive year. *only applies if E&P are on the balance sheet from previous C Corp status)
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Term
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Definition
- report income to SHs on a year-end consistent with that of the SHs
- calendar year-end is generally the default but can elect phiscal with IRS permission if business purpose for it.
- may elect year-end under Section 444 with no more than 3 months of deferral (deposit with IRS required if beneifts to SH exceeds $500)
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Term
| 5 Reporting Operations Rules for S Corps |
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Definition
- cash basis may be used unless corporation is a "tax shelter"
- reports taxable income and separately stated items for each SH on Schedule K-1 whether or not dividends were declared
- not entitles to DRD
- don't pay AMT, pershonal holding tax, or accumulated earnings tax
- can amortize start-up and organization expenses
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Term
| 3 Flow-through to SH rules for S corps |
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Definition
- if relative interests change, each SH calculated the share of income on a daily basis
- to calculate the daily share of income, divide annual income by # of days in a year and multiply by days owned for each SH and % ownership
- if SH interest is completely terminated, then share can be calculated by closing the books as of the termination date if ALL SH agree
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Term
| 4 adjustments to SH basis in S Corp stock |
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Definition
- add contributions of capital
- add SH share of income (including tax exempt income)
- subtract distributions to the SH
- subtract SH share of loss (including nondeductible expenses)
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Term
| 4 loss deduction limitations for S corp (in order) |
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Definition
- adjusted basis of the stock limits loss deductions because it can't be 0
- adjusted basis of loans can be used next (loan basis created when SH loans his/her funds to corp)
- SH may deduct losses to the extent they are "at risk" for investments in the corporation
- passive loss limits may also limit loss deductions depending upon the nature of the corporate business and the SH's participation in management activities
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Term
| 2 miscellaneous S Corp rules |
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Definition
- unused losses due to inadequate basis are carried forward indefinitely until the adjusted basis of the stock increases or the S election is revoked
- if S corp contirbutes appreciated property to a charitable organization, the corp can deduct the FMV of the property, but the SHs can reduce their basis only by the contributed propery's basis
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Term
| 2 distribution effects on Shareholder income if S Corp has no E&P |
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Definition
- amount of distribution is amount of cash plus the value of any property distributed
- distributions in excess of SH adjusted basis in stock are taxed as gains from sale of stock to SH
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Term
| 3 distribution rules if S Corp has E&P |
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Definition
- distributions follow order of: tax-free AAA, then from E&P (dividend income), then OAA and others result in return of capital (tax-free up to remaining stock basis) (*note: s corp can make "bypass election" which means the distribution can first come from E&P and then AAA)
- distributions from AAA reduce it to 0 (but not below 0, only losses can do this)
- distributions from AAA and OAA reduced the adjusted basis of SH stock
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Term
| "Accumulated Adjustments Account" (AAA) |
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Definition
- accumulated undistributed income generated during S status is recorded at the corporate level in the "Accumulated Adjustments Account" (AAA)
- AAA is adjusted the same way stock basis would be except (1) no adjusment is made for tax-exempt income and related expenses and (2) AAA can be negative (only can get that way from losses)
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Term
| Other Adjustments Account (OAA) |
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Definition
| other account that tracks tax exempt income earned by the corporation |
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Term
| Built-in Gains Tax for S Corps |
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Definition
- can only happen if corporation sells built-in gain property at the time of the S election
- gain is taxed at highest corporate rate and is limited to the net amount of built-in gain at the time of election
- tax can only be imposed for a period of 10 years after S election (*note: S corp years beginning in 2011 (or later), b-i gain not taxed if S election was in 2006. S corp years beginning in 2009 or 2010 (or later), b-i gain tax is not imposed if S election was made in 2002/2003)
- in year of sale, if prop is also sold that had built-in losses at date of S election, they can offset built-in gains
- total built-in gain taxable in any year is also limited to taxable income for that year
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Term
| Passive investment income tax |
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Definition
- S corporation may be subject to top corporate tax rate if the corp reports excessive passive investment income and the corporation has E&P for prior status as a C corporation
- excessive= more than 25% of gross receipts
- IRS may waive this tax if the corporation establishes that it made distributions within a reasonable time of discovering the E&P existed from a prior year
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