S Corporations
Determine the item that may be deducted by an S corporation. Only ordinary items (amortization of organizational expenditures) can be deducted by an S corporation.
Foreign income taxes separately reported to shareholders so it can individually elect to treat the payment of foreign income taxes as a deduction or as a credit. Net Sec. 1231 loss separately passed through to shareholders so that the Sec. 1231 netting process can take place at the shareholder level. Investment interest expense must be separately passed through to shareholders so the deduction limitation (i.e., limited to net investment income) can be applied at the shareholder level.
Amount of increase for each shareholder's basis in the stock of Haas Corp., a calendar-year S corporation.
Haas has two equal shareholders, each shareholder's stock basis will be increased by 50% of the operating income of $50,000, and 50% of the interest income of $10,000, resulting in an increase for each shareholder of $30,000.
Loss from an S corporation that can be deducted by each of two equal shareholders. An S corporation loss is passed through to shareholders and is deductible to the extent of a shareholder's basis for stock plus the basis for any debt owed the shareholder by the corporation.
Here, each shareholder's allocated loss of $45k ($90,000/2) is deductible to the extent of stock basis of $5k plus debt basis of $15k, or $20k. The remainder of the loss ($25k for each shareholder) can be carried forward indefinitely by each shareholder and deducted when there is basis to absorb it.
Meyer's share of an S corporation's $36,500 ordinary loss. An S corporation's items of income and deduction are allocated on a daily basis to anyone who was a shareholder during the taxable year.
Here, the $36,500 ordinary loss would be divided by 365 days to arrive at a loss of $100 per day. Since Meyer held 50% of the S corp.'s stock for 40 days, Meyer's share of the loss would be ($100 × 50%) × 40 days = $2,000.
Corp. that has been an S corporation from its inception may have both passive and nonpassive income, and be owned by a bankruptcy estate.
If a corp. has been an S corp. since its inception, there is no limitation on the amount or type of income that it generates, and it can have both passive and nonpassive income
Distributions to shareholders by an S corp. that has no accumulated earnings and profits. S corp. do not generate any earnings and profits, but may have accumulated earnings and profits from prior years as a C corp.
If accumulated earnings and profits are distributed to shareholders, the distributions will be taxed as dividend income to the shareholders. If an S corp. has no accumulated earnings and profits, distributions are generally nontaxable and reduce basis for stock. To the extent distributions exceed basis, they result in capital gain.
Amount of income that should be allocated to Z Corp.'s short S year when its S election is terminated on April 1, 2014. When a corp.'s subchapter S election is terminated during a taxable year, its income for the entire year must be allocated between the resulting S short year and C short year.
If no special election is made, the income must be allocated on a daily basis between S and C short years. $310,250/365 days = $850 per day. Terminated on April 1, 90 days in the S short year, $850 × 90 = $76,500 of income would be allocated to the TR for the S short year.
A subchapter S election that is filed on or before the 15th day of the third month of a corporation's taxable year is generally effective as of the beginning of the taxable year in which filed.
If the S election is filed after the 15th day of the third month, the election is generally effective as of the first day of the corporation's next taxable year.
Income from M (an S corp.) that should be reported on Kane's 2014 tax return. An S corporation's tax items are allocated to shareholders on a per share, per day basis.
Income $73K for TY, per day income is $73k/365 = $200. 100 shares outstanding, Manning's daily income per share is $200/100 = $2. Kane sold 25 of his shares on the 40th day of 2014 and held rest of 75 shares: 75 shs × $2 × 365 days = $54,750; 25 shs × $2 × 40 days = 2,000; Total = $56,750
Lazur's tax basis for the Beck Corp. stock after the distribution. A shareholder's basis for stock of an S corporation is increased by the passthrough of all income items (including tax-exempt income) and is decreased by distributions that are excluded from the shareholder's gross income.
Lazur's beginning basis of $12k is increased by his 50% share of Beck's ordinary business income ($40,500) and tax-exempt income ($5,000) and is decreased by the $51,000 cash distribution excluded from his gross income, resulting in a stock basis of $6,500
Amount of income from Graphite Corp. (an S corporation) that should be included in Smith's 2014 adjusted gross income. Smith is a 50% shareholder, half of the ordinary business income ($80k × 50% = $40k) and half of the tax-exempt interest ($6k × 50% = $3k) would pass through to Smith.
$40k of ordinary income in gross income, $3k of tax-exempt interest is excluded from gross income. $12k basis at BOY is increased by $40k of ordinary income & $3k of tax-exempt, to $55k. As a result, the $53k cash distribution would be nontaxable return of basis and would reduce the basis to $2k
$310k distribution that must be reported as dividend income by Robert?
BOY AAA and basis must first be increased by $200k of ordinary income that is taxed in 2014. This permits the first $250k of the distribution as nontaxable and will reduce AAA to zero and basis to $50k. $60k offset from AEP and must be reported as dividend income.
Item for which an S corporation is not permitted a deduction. Compensation of officers, interest paid to non shareholders, and employee benefits for non shareholders are deductible by an S corporation in computing its ordinary income or loss.
Charitable contributions, since they are subject to percentage limitations at the shareholder level, must be separately stated and are not deductible in computing an S corporation's ordinary income or loss.
S corporations are allowed to make charitable contributions.
Contributions separately pass through to shareholders and can be deducted as charitable contributions on shareholder returns.
If an S corporation has no accumulated earnings and profits from C years, distributions to shareholders are generally nontaxable and reduce a shareholder's stock basis.
To the extent that distributions exceed basis, result in capital gain. Basis for S corporation stock is first increased by income, then reduced by distributions that are excluded from gross income, and finally reduced by the pass through of losses & deductions
The date on which V Corp.'s S status became effective.
V Corp. uses a calendar year and its S election was filed on September 5, 2014, which is beyond the 15th day of the third month of the taxable year (March 15). As a result, Village's subchapter S status becomes effective as of the first day of its next taxable year, January 1, 2015.
If either a shareholder who held stock during the taxable year and before the date of election did not consent to the election, or the corp. did not meet the eligibility requirements before the date of election,
then valid election would be treated for the following taxable year.
$7,200 of health insurance premiums paid by Lane, Inc. (an S corp.) to be included in gross income by Mill. Compensation paid by an S corp. includes fringe benefit expenditures made on behalf of officers and employees owning more than 2% of the S corp. stock.
Mill is a 10% SH-employee, Mill's compensation income from his W-2 from Lane must include the $7,200 of health insurance premiums paid by Lane for health insurance covering his family. Mill may qualify to deduct 100% of the $7,200 for AGI as a self-employed health insurance deduction.
S corporation may have as many as 100 shareholders. S corporation cannot have both common and preferred stock outstanding because an S corporation is limited to a single class of stock.
Partnership is not permitted to be a shareholder in an S corporation because all S corporation shareholders must be individuals, estates, or certain trusts. Additionally, an S corporation cannot have a nonresident alien as a shareholder.
Distributions from an S corp. are treated as first coming from its accumulated adjustment account (AAA), and then are treated from its accumulated earnings and profits (AEP)
Positive balance in an S corp.'s AAA is nontaxable when distributed, $ already been taxed to shareholders during S years. S corp.'s AEP represents earnings accumulated during C years that have never been taxed to shareholders, and must be reported as dividend income when received.
Number of shares of voting and nonvoting stock that must be owned by shareholders making a revocation of an S election.
Revocation of an S election may be filed by shareholders owning > 50% of an S corp.'s outstanding stock. Both voting & nonvoting shares are counted. S corp. has a total of 50k voting and nonvoting shares outstanding, the shareholders consenting to the revocation must own > 25k shares.
The effect of the revocation statement on Dart Corp.'s S corporation election. 100k shares outstanding. Revocation stmt consented to by shareholders holding a total of 40k shares, would not be effective and would not terminate S corp. election
Revocation of an S election will be effective if signed by 50%+ of the S corp's outstanding stock. Both voting & nonvoting shares combined.
Render a corporation ineligible for S corporation status.
S corp. is limited to 100 shareholders. Decedent's estate and a bankruptcy estate are allowed as S corp. shareholders. S corp. may only have 1 class of stock issued and outstanding. A difference in voting rights among outstanding common shares; only 1 class of stock outstanding.
S corporation eligibility requirements. Restrict S corp. shareholders to individuals (other than nonresident aliens), estates, and certain trusts. Partnerships and C corporations are not permitted to own stock in an S corporation.
S corp. is permitted to be a partner in a partnership, and may own any percentage of stock of a C corp., as well as own 100% of the stock of a qualified subchapter S subsidiary.
Not a requirement for a corporation to elect S corporation status.
S corp. must have only one class of stock, be a domestic corporation, and confine shareholders to individuals, estates, and certain trusts. S corp. need not be a member of a controlled group.
S corporation's Accumulated Adjustments Account (AAA).
S corp. that has accumulated earnings and profits must maintain an AAA. AAA represents the cumulative balance of all items of the undistributed net income and deductions after 1982. S corp. will not generate any earnings and profits for taxable years beginning after 1982.
Condition that will prevent a corporation from qualifying as an S corporation.
S corp., a corp. must have only 1 class of stock outstanding and have < = 100 shareholders, who are either individuals, estates, or certain trusts. An S corp. may own any % of the stock of a C corp., and 100% of the stock of a qualified subchapter S sub.
Determine the earliest date on which Ace Corp. (calendar-year corp.) can be recognized as an S corp. I
S election will be effective as of the 1st day of a taxable year if the election is made on or before the 15th day of the 3rd month of taxable year.
Termination of an S election. S corporation is permitted to have a maximum of one hundred shareholders. A decedent's estate may be a shareholder of an S corporation.
S election will be terminated if an S corporation has passive investment income in excess of 25% of gross receipts for three consecutive taxable years, if the corporation also has subchapter C accumulated earnings and profits at the end of each of those three years.
Determine Stahl's basis for his S corporation stock at the end of the year.
Shareholder's basis for S corporation stock is increased by the passthrough of all income items (including tax-exempt income) and is decreased by distributions that are excluded from the shareholder's gross income, as well as the pass-through of all loss and deduction items (also nondeductible items)
The at-risk rules limit a taxpayer's deduction of losses to the amount that the taxpayer can actually lose (cash and the adjusted basis of property invested by the taxpayer, plus any liabilities for which the taxpayer is personally liable)
The at-risk rules apply to S corp. shareholders rather than at the corp., S corp. losses is limited to shareholder's at-risk investment. Not depend on the type of income from S corp., not subject to any elections made by S corp. shareholders, & no regard to the S corp.'s DE ratio.
AAA - no adjustment is made for tax-exempt income and related expenses, and no adjustment is made for federal income taxes attributable to a taxable year in which the corporation was a C corporation.
The payment of federal income taxes attributable to a C corporation year would decrease an S corporation's accumulated earnings and profits (AEP).
$30k distribution from an S corp. that is taxable to Baker. Baker's BOY basis of $25k would first be increased by the $1k of ordinary income, to $26k. Baker will not be able to deduct the long-term capital loss of $3k this year, the cash distribution reduced his stock basis to zero
Then the $30k cash distribution would be a nontaxable return of stock basis to the extent of $26k, with the remaining $4k in excess of basis taxable to Baker as capital gain. $3k loss will be carried forward and will be available as a deduction when Baker has sufficient basis to absorb the loss.
Due date of a calendar-year S corporation's tax return.
An S corporation must file its federal income tax return (Form 1120-S) by the 15th day of the third month following the close of its taxable year. Thus, a calendar-year S corporation must file its tax return by March 15, if an automatic six-month extension of time is not requested.
Shareholder's basis in the stock of an S corporation is increased by the shareholder's pro rata share of tax-exempt interest and taxable interest.
An S shareholder's stock basis must be increased by tax-exempt interest in order to permit a later distribution of that interest to be nontaxable.
Period that a calendar-year corporation must wait before making a new S election following the termination of its S status during 2014.
Following the revocation or termination of an S election, a corp. must wait 5 years before reelecting subchapter S status unless the IRS consents to an earlier election.
