Chapter 22 S Corporations

Suppose at the beginning of 2018, Jamaal's basis in his S corporation stock is $1,000, and he has a $10,000 debt basis associated with a $10,000 loan he made to the S corporation. In 2018, Jamaal's share of S corporation income is $4,000, and he received a $7,000 distribution from the S corporation. What is Jamaal's stock and debt basis after these transactions?

$0 stock basis; $10,000 debt basis. $1,000 (original stock basis) + $4,000 ordinary income − $7,000 distribution = $0 stock basis and a $2,000 distribution in excess of stock basis generating $2,000 of capital gain. Debt basis is not reduced by distributions.

Clampett, Inc. has been an S corporation since its inception. On July 15, 2019, Clampett, Inc. distributed $50,000 to J. D. His basis in his Clampett, Inc. stock on January 1, 2019, was $45,000. For 2019, J. D. was allocated $10,000 of ordinary income from Clampett, Inc. and no separately stated items. How much capital gain does J. D. recognize related to Clampett, Inc. in 2019?

$0. The distribution is not taxable because J. D.'s basis is $55,000 prior to the distribution: ($45,000 original basis + $10,000 increase in basis from distributive share of ordinary income. Thus, J. D. has no capital gain.)

Clampett, Inc. has been an S corporation since its inception. On July 15, 2019, Clampett, Inc. distributed $50,000 to J. D. His basis in his Clampett, Inc. stock on January 1, 2019, was $30,000. For 2019, J. D. was allocated $10,000 of ordinary income from Clampett, Inc. and no separately stated items. How much capital gain does J. D. recognize related to Clampett, Inc. in 2019?

$10,000 from distribution in excess of basis: ($50,000 distribution − $30,000 basis − $10,000 increase in basis from distributive share of ordinary income.)

Assume that at the end of 2018, Clampett, Inc. (an S corporation) distributes long-term capital gain property (fair market value of $40,000, basis of $25,000) to each of its four equal shareholders (aggregate distribution of $160,000). At the time of the distribution, Clampett, Inc. has no corporate E&P and J. D. has a basis of $15,000 in his Clampett, Inc. stock. How much income does J. D. recognize as a result of the distribution?

$15,000 distributive share of the gain on the distribution ($40,000 − $25,000) plus $10,000 due to the $40,000 distribution exceeding J. D.'s $30,000 basis ($15,000 original basis + $15,000 increase in basis from gain from property distribution).

Assume Joe Harry sells his 25% interest in Joe's S Corp., Inc. to Tyrone on January 29. Using the specific identification allocation method, how much income does Joe Harry report if Joe's S Corp., Inc. earned $200,000 from January 1 to January 29 and a total of $1,460,000 from January 1 through December 31 (365 days)?

$200,000 × 25% = $50,000

Assume that Clampett, Inc. has $200,000 of sales, $150,000 of cost of goods sold, $60,000 of interest income, and $40,000 of dividends. What is Clampett, Inc.'s excess net passive income?

$25,000 = $100,000 net passive investment income x [(($100,000 passive investment income) − 25% × gross receipts (25% x ($200,000 sales + $100,000 passive income)))/$100,000 passive investment income].

Assume that at the end of 2018, Clampett, Inc. (an S corporation) distributes property (fair market value of $40,000, basis of $5,000) to each of its four equal shareholders (aggregate distribution of $160,000). At the time of the distribution, Clampett, Inc. has no corporate E&P and J. D. has a basis of $50,000 in his Clampett, Inc. stock. How much income does J. D. recognize as a result of the distribution?

$35,000 distributive share of the gain on the distribution ($40,000 − $5,000).

Suppose at the beginning of 2018, Jamaal's basis in his S corporation stock was $27,000 and that Jamaal has directly loaned the S corporation $10,000. During 2018, the S corporation reported an $80,000 ordinary business loss and no separately stated items. How much of the ordinary loss is deductible by Jamaal if he owns 50% of the S corporation?

$37,000. Losses are limited to stock basis of $27,000 plus debt basis of $10,000.

Assume Joe Harry sells his 25% interest in Joe's S Corp., Inc. to Tyrone on January 29. Using the daily allocation method, how much income does Joe Harry report if Joe's S Corp., Inc. earned $200,000 from January 1 to January 29 and a total of $1,460,000 from January 1 through December 31 (365 days)?

($1,460,000/365 days) × 29 days × 25% = $29,000

Suppose at the beginning of 2018, Jamaal's basis in his S corporation stock is $0, he has a $0 debt basis associated with a $10,000 loan he made to the S corporation and a $5,000 suspended loss from the S corporation. In 2018, Jamaal contributed $8,000 to the S corporation, and the S corporation had ordinary income of $4,000. Assume that Jamaal owns 40% of the S corporation. What is Jamaal's stock and debt basis at the end of 2018?

By rule, any net increase in basis for the year first restores the shareholder's debt basis (up to the outstanding debt amount) and then the shareholder's stock basis. Jamaal's debt basis is calculated as: $0 beginning of year basis + $8,000 contribution + $1,600 ($4,000 × 40%) share of S corporation income − $5,000 suspended loss = $4,600 at the end of 2018. Jamaal's stock basis remains at zero at the end of 2018 because his debt basis has not been restored to its outstanding debt amount, $10,000.

S corporation distributions of cash are not taxable to the shareholder to the extent of the combined shareholder's stock and debt basis. True or False?

False

S corporations are required to recognize both gains and losses on non-liquidating distributions of property to shareholders. True or False?

False

An S corporation can make a voluntary revocation of an S election if shareholders holding more than 25 percent of the S corporation stock (including nonvoting shares) agree. True or False?

False: the shareholders must hold more than 50 percent of the stock to make a voluntary revocation.

What would not result in an S election termination?

Having excess passive investment income for two consecutive years.

Clampett, Inc. has been an S corporation since its inception. On July 15, 2019, Clampett, Inc. distributed $50,000 to J. D. His basis in his Clampett, Inc. stock on January 1, 2019, was $30,000. For 2019, J. D. was allocated $10,000 of ordinary income from Clampett, Inc. and no separately stated items. What is J. D.'s basis in his Clampett, Inc. stock after all transactions in 2019?

J. D.'s basis is $0 because the $50,000 distribution exceeds his basis of $40,000 prior to the distribution calculated from $30,000 original basis plus $10,000 increase in basis from his distributive share of income and distributions cannot cause stock basis to drop below zero.

Clampett, Inc. has been an S corporation since its inception. On July 15, 2019, Clampett, Inc. distributed $50,000 to J. D. His basis in his Clampett, Inc. stock on January 1, 2019, was $45,000. For 2019, J. D. was allocated $10,000 of ordinary income from Clampett, Inc. and no separately stated items. What is J.D.'s basis in his Clampett, Inc. stock after all transactions in 2019?

J. D.'s basis is $5,000 calculated from $45,000 original basis plus $10,000 increase in basis from his distributive share of income minus $50,000 distribution.

If Annie and Andy (each a 30% shareholder in a calendar year S corporation) file a revocation statement on February 10, 2018 to terminate their S corporation's S election, what is the effective date of the S corporation termination (assuming they do not specify one)?

January 1, 2018. Because more than 50% of the shareholders make a valid S termination election before 2 ½ months of the current year, the election is valid as of the beginning of the year.

Jane has been operating Mansfield Park as a C corporation and decides she would like to make an S election. What is the earliest the election will become effective if Jane makes the election on February 10, 2018. She needed a little time to convince a C corporation shareholder to sell its stock to a qualifying shareholder. That process took all of January?

January 1, 2019 - The Corporation did not meet all the requirements to be considered an S corporation from the beginning of the year since it had a C corporation as a shareholder at the beginning of 2018, so the election won't take effect until the following year.

J. D. formed Clampett, Inc. as a C corporation (calendar tax year) with J. D., Granny, and Jethro, Inc. (a C corporation) as shareholders. On January 15, 2018, Jethro, Inc. sold all its shares to Jane Hathaway. On February 28, 2018, Clampett, Inc. filed an S corporation election, with J. D., Granny, and Jane all consenting to the election. What is the earliest effective date of the S election?

January 1, 2019. Because Clampett, Inc. had an ineligible shareholder (Jethro, Inc.) during 2018, the election is not effective until the beginning of 2019.

S Corp Election

S Corp Election: • Be a domestic corporation - created or organized in the United States or under U.S. law or the law of any state in the United States. • Not be a specifically identified ineligible corporation. • Have only one class of stock.

S Corporations owner limitations

S corporations are limited as to type and number of owners / shareholders. Only U.S. citizens or residents, estates, certain trusts, and certain tax-exempt organizations may be shareholders. No corporations or partnerships can be shareholders. S corporations may have no more than 100 shareholders. Large, publicly traded corporations cannot elect to be treated as S corporations.

In the past several years, Shakira had loaned money to Shakira Inc. (an S corporation) to help the corporation keep afloat in a downturn. Her stock basis in the S corporation is now $0, and she had deducted $40,000 in losses that reduced her debt basis from $100,000 to $60,000. Things appear to be turning around this year, and Shakira Inc. repaid Shakira $20,000 of the $100,000 outstanding loan. What is Shakira's income, if any, on the partial loan repayment?

The $20,000 repayment must be pro-rated between the portion of the debt with remaining basis ($60,000) and the portion of the debt with no basis ($40,000). To the extent the repayment is attributable to the portion of the debt with no basis, Shakira must recognize a capital gain (the debt is a capital asset). In this situation 60 percent of the debt has basis ($60,000/$100,000) and 40 percent does not ($40,000/$100,000). Consequently, Shakira must recognize $8,000 of capital gain on the repayment ($20,000 payment × 40%).

Voluntary Revocation of S Corp

The corporation can make a voluntary revocation of the S election if shareholders holding more than 50 percent of the S corporation stock including nonvoting shares all agree.

Section 351 transfer of appreciated property

These rules allow shareholders meeting the requirements to defer gains they realize when they transfer appreciated property to the corporation in exchange for stock.

For S corporations without earnings and profits from prior C corporation years, the taxation of cash distributions to the shareholder is very similar to the rules for partnerships. True or False?

True

Bobby T (95% owner) would like to elect S corporation status for DJ, Inc. but Dallas (5% owner) does not want to elect S corporation status. Bobby T cannot elect S status for DJ, Inc. without Dallas' consent. True or False?

True: all shareholders on the date of the election must consent to the election.

S Corp Termination

election is terminated if the S corporation has passive investment income in excess of 25 percent of gross receipts for three consecutive years.

Gross Receipts

gross receipts is the total amount of revenues received including net capital gains from the sale of capital assets and gain not offset by losses from the sale of stock and securities or accrued under the corporation's accounting method, not reduced by returns, allowances, cost of goods sold, or deductions.

Accumulated Adjustments Account (AAA)

tax laws require the corporation to maintain an accumulated adjustments account (AAA) to determine the taxability of S corporate distributions.