Reg 3 - S Corporation
Qualified Business Income Calculation Steps for Category 1 - less than threshold. *Includes SSB and NON SSB* example threshold amount of 157,500 QBI 58,600 W-2 wages 102,000 Unadjusted basis of qualified proerpty - 54,000 Taxable income 82,000 (capital gain of 3,000) if capital gains, remove capital gains from capital gains to get net taxable income.
Select lesser of: 20% * QBI 20* (taxable income - net capital gains) 58,600 * .20 = 11,720 (82,000-3,000) * .20 = 15,800
S Corporation Separately Stated Items
items are passed through according to percentage of ownership (per Share per Day method). if no change is ownership then percentage of ownership.
When an S corporation election can be made during year, and when does it take effect?
made within the first 2 1/2 months of the fiscal year, it can take effect as of the beginning of that year. For a calendar year corporation, an election on February 10 falls within the first 2 1/2 months, and can be made effective as of January 1 of the same year.
Bash basis when S-Corp adopting C corporation rule on accrual and cash?
if gross receipts greater than 25 million it will have to use accrual basis of accounting.
Qualified Business Income Calculation Above Thresholds if Service provider (SSB)(accountant, lawyer, Dr., athlete) excludes engineers Taxable income Thresholds: example: Single 157,500 - 205,500 Married Joint 315,000 - 415,000 Accountant with taxable income above 350,000
QBI deduction does not apply mostly because service provider is limited
After a corporation's status as an S corporation is revoked or terminated, how many years is the corporation required to wait before making a new S election, in the absence of IRS consent to an earlier election?
After a corporation's status as an S corporation is terminated, it must wait at least 5 years before reelecting treatment as an S corporation.
Stone Corp. has been an S corporation since inception. In each of year 1, year 2, and year 3, Stone made distributions in excess of each shareholder's basis. Which of the following statements is correct concerning these three years? Why? and how is it reported?
All distributions in excess of a shareholder's basis are taxed as capital gains, so the excess distributions would be taxed as capital gains in all three years.
An S corporation issues both preferred and common stock to shareholders at inception. This will not affect S corporations Eligibility (True or False) Why or why not?
False An S corporation may have only one class of stock—common stock—though that one class may have different voting rights.
An S corporation since inception, has passive investment income for 3 consecutive years following the year a valid S corporation election takes effect. S Corporation election is terminated as of the first day of the fourth year (True or False) Why or Why not?
False Receipt of passive investment does not terminate an corporations investment
S Corporation Formation (*Small and Simple*) Rules how many shareholders? types of shareholders? shareholders citizenship standing?
*No more than 100 shareholders* More than six generations above and their spouses may be treated as a single shareholder for purpose of this rule *All shareholders must be individuals * No corporation or partnership as shareholder An S corporation can own stock in a C corp. *All shareholders must be either resident or citizens of the US* *Must be a domestic corporation* *Only one class of stock (no preferred stock)*
S Corporation - Calculating New Net Bases side note, how does income for year change basis for an S corporation?
1. + Income items, including gains 2. - Distributions (does not include dividend distributions from C corp years) 3. - Nondeductible, noncapital expenses (eg, nondeductible portion of meals and entertainment expense) and depletion 4. - Items of loss and deduction (if amounts are greater than remaining basis, allocate them proportionally until basis is reduced to 0, and remainder is suspended until enough basis exists to absorb it) 2. Ordinary income is an increase to basis.
The IRS requires that the annual calculation of a shareholder's S-Corporation stock basis be conducted in the following order: 4 items
1. Increased for income items, including gains; 2. Decreased for distributions; 3. Decreased for non-deductible, non-capital expenses and depletion 4. Decreased for items of loss and deduction.
Commerce Corp. elects S corporation status as of the beginning of Year 10. At the time of Commerce's election, it held a machine with a basis of $20,000 and a fair market value of $30,000. In March of Year 10, Commerce sells the machine for $35,000. What would be the amount subject to the built-in gains tax?
10,000 If a C corporation elects S corporation status and the fair market value of an asset exceeds its basis, the difference is a net unrealized built-in gain subject to built-in gains tax if the asset is sold within five years.
What is "At-Risk" rule?
A shareholder is considered "at risk" for the shareholder's investment plus any portion of entity liabilities for which the shareholder will be liable in the case of default by the entity. basically what you have at risk to lose (money and debts shared by holders)
Mission Co. is an S corporation formed on January 1, 20X4 by four individuals who materially participate in Mission's business. Each of Mission's shareholders is a 25% owner of the corporation. Mick, one of Mission's shareholders, invested $12,000 in Mission's capital stock and loaned $10,000 to the corporation. Mission sustained an operating loss of $120,000 for the year for the year ended on December 31, 20X4 (@25% = 30,000). How much of this loss can Mick claim in his 20X4 income tax return? up to what extend can shareholder deduct losses on an S Corp? why?
A shareholder may only deduct losses to the extent that the shareholder has basis. Basis = 12,000 + 10,000 = 22,000 22,000 - 30,000 = (8,000) carry forward) 22,000 loss deducted
A sole proprietorship incorporated on January 1 and elected S corporation status. The owner contribute the following assets to the S Corporation: Machinery Basis 7,000 - FMV 8000 Building Basis 11,000 - FMV 100,000 Two years later, the corporation sold the machinery for 4,000 and the building for 110,000. The machinery had accumulated depreciation of 2,000 and building had accumulated depreciation of 1,000. What is the built in gain recognized on the sale?
Built in gain tax only applies when C corporation elects S corporation status. Answer: 0
Nichol Corp. gave gifts to 15 individuals who were customers of the business. The gifts were not in the nature of advertising. The market values of the gifts were as follows: 5 gifts @ $15 each = 75 9 gifts @ $30 each = 270 1 gift @ $100 = 100 What amount is deductible as business gifts?
Business gifts are deductible up to a maximum of $25 per recipient per year. The 5 gifts valued at $15 each are fully deductible.
Income computed formula and how transfer to shareholder
Formula: Ordinary Income/Loss + Muni Bond Interest + Separately Stated Income items Earnings per day: income average 365,000/365 = 1,000 per day Share holder owns 5 shares 100 shares total outstanding 1,000/100 = 10 per share $10 * 5 * #of days owned in year
Rocket Co., an S corporation, pays single coverage health insurance premiums of $17,000 per year. Philip is a 1% shareholder-employee in Rocket. On Philip's behalf, Rocket pays Philip's family coverage under the health insurance plan. What amount of insurance premiums is includible in Philip's gross income? what if owned more than 2%
Health insurance premiums and other fringe benefits paid for employees by an S corporation are deductible in computing the entity's ordinary income. If paid for an employee who is also a shareholder owning more than 2% of the entity, it is includible in the employee's gross income.
Ignoring any limitations, a Section 199A Qualified Business Income deduction may be claimed on which of the following tax returns?
Individual tax returns.
qualifying shareholders of an S corporation is correct? who do not qualify?
Individuals Certain Exempt Organization Estates Certain Trusts US Citizens or resident aliens *No corporation or partnerships
how are long term capital losses treated in corporation?
It is treated as a short-term capital loss whether or not it was short-term when sustained.
An S corporation's revocation statement is effective if it is signed by shareholders owning can C corporation own S corporation?
More than 50% of S corporations voting and nonvoting stock corporation can't be an S corp shareholder.
Can an S corp own stocks in C corp
Owning C corporation stock does not violate any eligibility requirements that must be met for operating as an S corporation
C Coropation becomes an S- Corporation - Mid year
Retroactive - if filed within 2.5 months from beginning of year. In essence S-Corp for full year if filed after that time then filing as C corp for first year and S corp following year.
The costs of organizing a corporation:
The $5,000 amount is reduced by the amount by which the organizational expenditures exceed $50,000. Any costs not currently deductible are amortized over 180 months. The corporation may also elect not to deduct the $5,000 and instead amortize the total amount of organizational expenditures over 180 months.
Absent an election to close the books, the allocation of nonseparately stated income or loss for an S corporation shareholder that changed his ownership interest during the year is computed based on which of the following ownership percentages?
The allocation of nonseparately stated income or loss for an S corporation shareholder that changed his or her ownership interest during the year is computed based on ownership percentage computed on a per-share per-day basis.
What is the tax rate for an S corporation that pays tax on built-in gains?
The built-in gains tax, which is assessed when a C corporation elects S corporation status, is based on the gain that would be taxable if appreciated assets were sold on the date of election and is assessed at the highest corporate rate. The highest corporate income tax rate.
The two equal shareholders of a C corporation are thinking of filing an election to have the company treated as an S corporation. Which of the following consequences is an advantage of this election?
The corporation's capital losses can be claimed on the tax returns of the shareholders. This includes capital losses, which are not deductible to a C corporation but may be carried back or carried forward to offset capital gains. Because each S corporation shareholder has the ability to deduct up to $3,000 of their share of S corporation capital losses immediately, this is a unique benefit of S corporation status.
HDF, a calendar-year corporation, began business in year 1. HDF made a valid S corporation election on December 1, year 2. Assuming the eligibility requirements for S corporation status continued to be met throughout year 3, on which of the following dates did HDF's S corporation status become effective?
The election to become an S corporation must be made by the 15th day of the 3rd month of the tax year (March 15 for calendar corporations) in order to be effective for that year. Any election made after that will become effective as of the beginning of the following tax year. January 1, year 3
A corporation elected S corporation status. All shareholders gave their written consent, except for a missing shareholder who owns 1% of the outstanding stock. Which of the following statements about this situation is correct?
The election to become an S corporation must be made unanimously by all shareholders, and Column K, Shareholder's Consent Statement, of Form 2553 must be signed and dated by all shareholders.
The sole shareholder of an S corporation contributed equipment with a fair market value of $20,000 and a basis of $6,000 subject to $12,000 liability. What amount is the gain, if any, that the shareholder must recognize?
The shareholder has contributed equipment subject to a $12,000 liability, which is greater than the shareholder's adjusted basis in the equipment, and therefore the shareholder must recognize a gain in the amount of $6,000, which is the excess of the liability over the adjusted basis in the property.
Carson owned 40% of the outstanding stock of a S corporation. During a tax year, the corporation reported $400,000 in taxable income and distributed a total of $70,000 in cash dividends to its shareholders. How much income should Carson report and why?
The shareholders pay taxes on the income in the period earned, not in the period distributed. Since Carson owns 40% of the corporation, Carson will be taxed on 40% of the $400,000 in income, or $160,000.
An S corporation has 30,000 shares of voting common stock and 20,000 shares of nonvoting common stock issued and outstanding. The S election can be revoked voluntarily with the consent of the shareholders holding, on the day of the revocation: A.Shares of voting stock: 0 Shares of nonvoting stock: 20,000 B.Shares of voting stock: 7,500 Shares of nonvoting stock: 5,000 C.Shares of voting stock: 20,000 Shares of nonvoting stock: 0 D.Shares of voting stock: 10,000 Shares of nonvoting stock: 16,000
Voluntarily revoking an S Corporation election requires the consent of a majority of the shares, regardless of whether they are voting or nonvoting shares. Shares of voting stock: 10,000 Shares of nonvoting stock: 16,000
Dove and Eagle formed a business entity in which they are equal owners. Dove contributed cash of $100,000, and Eagle contributed land with a basis of $40,000 and fair market value of $100,000. For its first year of operations, the entity had taxable income of $60,000 and made no distributions. At year end it had outstanding recourse liabilities to third parties of $10,000. Eagle had a basis of $70,000 in the entity at the end of the first year of operations. What type of entity was formed?
When a shareholder contributes appreciated property in exchange for stock, as long as at least 80% of the stock is issued to shareholders in exchange for cash and property, it will be a nontaxable transaction and the shareholder's basis in the stock will be the basis in the property, or $40,000. Since an S corporation is a pass-through entity, the income is taxable to the shareholder, increasing the basis by Eagle's 50%, or $30,000, resulting in a basis of $70,000. If the entity had been a C corporation, Eagle would not be taxed on 50% of the income, nor would it increase the tax basis in the stock. If the entity had been a partnership, Eagle's basis would be increased by a proportionate amount of recourse debt, or $5,000. An LLC with multiple members is usually treated like a partnership.
When a shareholder contributes property to obtain stock, what will determine the valuation of the investment, when the total shares owned by contributors of cash and property is less than 80%?
When contributors of cash and property in exchange for equity upon formation of a corporation do not receive at least an 80% controlling interest, the transfers of cash, property, and services are taxable. The fair market value of the property.
Taxability of Distributions to shareholders of an S corporation
assumed to first come from the accumulated adjustment account, which is made up of the entity's earnings that have already passed through to shareholders but have not yet been distributed. These distributions are not taxable since they represent amounts that have already been taxed.
S Corporation Advantages and Form
business losses can be passed through for taxation at entrepreneur's personal tax rate avoids double taxation of income Form 1120-S Election must be unanimously (100%)
S Corp accumulated adjustments account (AAA) consists of
corporations income, net of deduction, that has not been distributed to shareholders (can have interest and dividends).
An affiliated group of corporations
may elect to file a consolidated return. An affiliated group is one or more corporations connected through stock ownership, with a common parent corporation owning at least 80% of the stock in at least one other includible corporation.
Fringe benefits paid on half of S-Corporation to S-Corp shareholder/employee.
must be paid on behalf of a greater than 2% shareholder are included. if less than 2% ownership then not included as income.
The built-in gains (BIG) tax applies when a C corporation elects S corporation status and the fair market value of any asset held by the C corporation exceeds its basis. reasoning and how does it occur (flow)?
previously c corporation and coverts to S corp. the assets held as c corp appreciate in value and when transfered to S corp the value its at original basis. Hence unrealized gain could be a loophole for s corporation.
Harold gives one share of stock in Harold Corp., an S Corp, to each the following individuals: His nephew His son His adopted step-daughter His grandson His cousin What is the minimum number of additional S-Corp shareholders under Code Section 1361 that will result from this distribution of stock?
shareholders that are directly related, going up to six generations, may be treated as a single taxpayer. great-grandparents, grandparents, parents, children, brothers and sisters, grandchildren, great-grandchildren, aunts, uncles, cousins, and the respective spouses are family members for this purpose. As a result, Harold's nephew, son, adopted step-daughter, grandson, and cousin may all be considered the same as Harold and will not result in any additional shareholders.
