Chpt. 22 S Corporations

Pine Corp., a calendar-year corporation, was formed three years ago by its sole shareholder, Connor, who has always operated it as a C corporation. However, at the beginning of this year, Connor made a qualifying S election for Pine Corp., effective January 1. Pine Corp. reported $70,000 of C corporation earnings and profits on the effective date of the S election. This year (its first S corporation year), Pine Corp. reported business income of $50,000. Connor's basis in his Pine Corp. stock at the beginning of the year was $15,000. Connor received a $60,000 distribution from Pine Corp. at the end of the year.

Dividend = $10,000 Stock Basis = $15,000 Pine Corp.'s AAA account at beginning of the year = $0 and is increased to $50,000 by the business income it earned. $50,000 of the $60,000 distribution comes from Pine Corp.'s AAA reducing it to $0. The remaining $10,000 comes from Pine Corp.'s E&P (reducing its E&P to $60,000) Connor's stock basis at the beginning of the year was $15,000 and it is increased by $50,000 to $65,000 by the ordinary income. The $50,000 distribution from Pine Corp.'s AAA reduces Connor's stock basis to $15,000. Connor is taxed on a $10,000 dividend (distribution from Pine Corp.'s E&P).

Pine Corp., a calendar-year corporation, was formed three years ago by its sole shareholder, Connor, who has always operated it as a C corporation. However, at the beginning of this year, Connor made a qualifying S election for Pine Corp., effective January 1. Pine Corp. reported $70,000 of C corporation earnings and profits on the effective date of the S election. This year (its first S corporation year), Pine Corp. reported business income of $50,000. Connor's basis in his Pine Corp. stock at the beginning of the year was $15,000. Connor received a $150,000 distribution from Pine Corp. at the end of the year.

Dividend = $70,000 Capital Gain = $15,000 Stock Basis = $0 Pine Corp.'s AAA account at beginning of the year = $0 and is increased to $50,000 by the business income it earned. $50,000 of the $150,000 distribution comes from Pine Corp.'s AAA reducing it to $0. $70,000 of the remaining $100,000 is out of Pine Corp.'s E&P reducing it to $0. The remaining $30,000 of the distribution is a return of capital or capital gain to Connor. Connor's stock basis at the beginning of the year was $15,000 and it is increased by $50,000 to $65,000 by the ordinary income. The $50,000 distribution from Pine Corp.'s AAA reduces Connor's stock basis to $15,000. Connor is taxed on a $70,000 dividend (distribution from Pine Corp.'s E&P). The remaining $30,000 first reduces Connor's stock basis to $0 and then creates $15,000 of long-term capital gain to Connor.

Pine Corp., a calendar-year corporation, was formed three years ago by its sole shareholder, Connor, who has always operated it as a C corporation. However, at the beginning of this year, Connor made a qualifying S election for Pine Corp., effective January 1. Pine Corp. reported $70,000 of C corporation earnings and profits on the effective date of the S election. This year (its first S corporation year), Pine Corp. reported business income of $50,000. Connor's basis in his Pine Corp. stock at the beginning of the year was $15,000. Connor received a $130,000 distribution from Pine Corp. at the end of the year.

Dividend = $70,000 Stock Basis = $5,000 Pine Corp.'s AAA account at beginning of the year = $0 and is increased to $50,000 by the business income it earned. $50,000 of the $130,000 distribution comes from Pine Corp.'s AAA reducing it to $0. $70,000 of the remaining $80,000 is out of Pine Corp.'s E&P reducing it to $0. The remaining $10,000 of the distribution is a reduction to Connor's stock basis. Connor's stock basis at the beginning of the year was $15,000 and it is increased by $50,000 to $65,000 by the ordinary income. The $50,000 distribution from Pine Corp.'s AAA reduces Connor's stock basis to $15,000. Connor is taxed on a $70,000 dividend (distribution from Pine Corp.'s E&P). The remaining $10,000 reduces Connor's stock basis to $5,000.

Pine Corp., a calendar-year corporation, was formed three years ago by its sole shareholder, Connor, who has always operated it as a C corporation. However, at the beginning of this year, Connor made a qualifying S election for Pine Corp., effective January 1. Pine Corp. reported $70,000 of C corporation earnings and profits on the effective date of the S election. This year (its first S corporation year), Pine Corp. reported business income of $50,000. Connor's basis in his Pine Corp. stock at the beginning of the year was $15,000. Connor received a $40,000 distribution from Pine Corp. at the end of the year.

Stock Basis = $25,000 Pine Corp.'s AAA account at beginning of the year = $0 and is increased to $50,000 by the business income it earned. The $40,000 distribution comes entirely from its AAA. Connor's stock basis at the beginning of the year was $15,000, and it is increased by $50,000 to $65,000 by Pine Corp.'s business income. The distribution reduces the stock basis to $25,000 ($65,000 basis - $40,000 distribution). Connor isn't taxed on the distribution.

Birch Corp., a calendar-year corporation, was formed three years ago by its sole shareholder, James, who has operated it as an S corporation since its inception. Last year, James made a direct loan to Birch Corp. in the amount of $9,250. Birch Corp. has paid the interest on the loan but has not yet paid any principal. (Assume the loan qualifies as debt for tax purposes.) For the year, Birch experienced a $31,000 business loss. At the beginning of the year, James's basis in his Birch Corp. stock was $9,100 and his basis in his Birch Corp. debt was $9,250.

Amount of loss clearing tax basis limitation = $18,350 Basis in stock = $0 Basis in debt = $0 Of $31,000 loss, only $18,350 clears tax basis limitation. James's stock basis and debt basis is reduced to $0 and he has suspended loss of $12,650 ($31,000 - $18,350)

Birch Corp., a calendar-year corporation, was formed three years ago by its sole shareholder, James, who has operated it as an S corporation since its inception. Last year, James made a direct loan to Birch Corp. in the amount of $9,250. Birch Corp. has paid the interest on the loan but has not yet paid any principal. (Assume the loan qualifies as debt for tax purposes.) For the year, Birch experienced a $31,000 business loss. At the beginning of the year, James's basis in his Birch Corp. stock was $51,400 and his basis in his Birch Corp. debt was $9,250.

Amount of loss clearing tax basis limitation = $31,000 Basis in stock = $20,400 Basis in debt = $9,250 All $31,000 of loss clears tax basis limitation. James stock basis is reduced to $20,400 ($51,400 basis - $31,000 loss). His debt basis remains the same.

Birch Corp., a calendar-year corporation, was formed three years ago by its sole shareholder, James, who has operated it as an S corporation since its inception. Last year, James made a direct loan to Birch Corp. in the amount of $9,250. Birch Corp. has paid the interest on the loan but has not yet paid any principal. (Assume the loan qualifies as debt for tax purposes.) For the year, Birch experienced a $31,000 business loss. At the beginning of the year, James's basis in his Birch Corp. stock was $0 and his basis in his Birch Corp. debt was $9,250.

Amount of loss clearing tax basis limitation = $9,250 Basis in stock = $0 Basis in debt = $0 $9,250 clears the tax basis limitation. James's stock basis remains at $0 and his debt basis is reduced to $0. James has a suspended loss of $21,750 ($31,000 - $9,250)

Jessica is a one-third owner in Bikes-R-Us, an S corporation that experienced a $45,000 loss this year (year 1). If her stock basis is $10,000 at the beginning of the year, how much of this loss clears the hurdle for deductibility (assume the at-risk limitation equals the tax-basis limitation)?

Deductible Amount = $10,000 Jessica allocated $15,000 of loss ($45,000 x 1/3). Only allowed to deduct $10,000 of allocation because that's the amount of her stock basis.

Jessica is a one-third owner in Bikes-R-Us, an S corporation that experienced a $45,000 loss this year (year 1). Assume her stock basis is $10,000 at the beginning of the year and that at the beginning of year 1 Jessica loaned Bikes-R-Us $3,000. In year 2, Bikes-R-Us reported ordinary income of $12,000. What amount is Jessica allowed to deduct in year 1?

Deductible Amount = $13,000 Jessica is allocated $15,000 of loss. She's allowed to deduct $10,000 of the loss from stock basis and $3,000 of the loss from debt basis.

Maple Corp., a calendar-year corporation, was formed three years ago by its sole shareholder, Brady, who immediately elected S corporation status. On December 31 of the current year, Maple distributed $33,500 cash to Brady. At the time of the distribution, Brady's basis in his Maple Corp. stock was $39,200.

Gain = $0 Brady would recognize $0 gain and his stock basis would be reduced from $39,200 to $5,700 ($39,200 original basis - $33,500 distribution)

Maple Corp., a calendar-year corporation, was formed three years ago by its sole shareholder, Brady, who immediately elected S corporation status. On December 31 of the current year, Maple distributed $33,500 cash to Brady. At the time of the distribution, Brady's basis in his Maple Corp. stock was $9,750.

Gain = $23,750 Long-term capital gain. Brady would recognize a $23,750 long-term capital gain because the distribution exceeds his basis by that amount. His stock basis would be reduced to $0.

Maple Corp., a calendar-year corporation, was formed three years ago by its sole shareholder, Brady, who immediately elected S corporation status. On December 31 of the current year, Maple distributed $33,500 cash to Brady. At the time of the distribution, Brady's basis in his Maple Corp. stock was $0.

Gain = $33,500 Long-term capital gain Brady would recognize a $33,500 long-term capital gain because the distribution exceeds his stock basis by that amount. His stock basis would remain at $0

Jessica is a one-third owner in Bikes-R-Us, an S corporation that experienced a $45,000 loss this year (year 1). Is she able to deduct her entire loss if she sells her stock at year-end?

If Jessica sells the stock before creating additional basis, the loss disappears unused.

Jessica is a one-third owner in Bikes-R-Us, an S corporation that experienced a $45,000 loss this year (year 1). If she cannot deduct the whole loss, what happens to the remainder?

The remainder of the loss ($5,000) is suspended until she creates additional basis.

Jessica is a one-third owner in Bikes-R-Us, an S corporation that experienced a $45,000 loss this year (year 1). Assume her stock basis is $10,000 at the beginning of the year and that at the beginning of year 1 Jessica loaned Bikes-R-Us $3,000. In year 2, Bikes-R-Us reported ordinary income of $12,000. What are her stock and debt bases in the corporation at the end of year 1?

Year 1: Stock Basis = $0 Debt Basis = $0

Jessica is a one-third owner in Bikes-R-Us, an S corporation that experienced a $45,000 loss this year (year 1). Assume her stock basis is $10,000 at the beginning of the year and that at the beginning of year 1 Jessica loaned Bikes-R-Us $3,000. In year 2, Bikes-R-Us reported ordinary income of $12,000. What are her stock and debt bases in the corporation at the end of year 2?

Year 2: Stock Basis = $0 Debt Basis = $2,000 She has $2,000 suspended loss at the end of year 1. In year 2, Jessica's share of ordinary income is $4,000 ($12,000 x 1/3) and restores her debt basis to the full $3,000 and then remaining $1,000 increases her stock basis. Year 1 carryover loss ($2,000) first decreases stock basis to $0 and then remaining $1,000 decreases her debt basis.