Ch 3 REG - S corps

For purposes of determining that there are no more than 100 shareholders of an S corporation,

Under this broad definition, 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.

health insurance premiums and other fringe benefits paid for by S-corp for employees are deductible in computing ordinary income, if paid for an employee who is a shareholder owning more than 2%...

it's included in the employees gross income

overall QBI limit

lessor of combined QBI deduction or 20% of taxable income - net cap gain

Qualified Business Income

generally ordinary business income/deductions, but NOT compensation paid to owners for services, cap gain/losses, dividends, or interest income other than business interest income.

termination

voluntary = 50% like a marriage, w/in 2 1/2 mo of the year effective 1st of the current year, otherwise next year involuntary = violate small & simple req: less 100 shareholders, individuals, US cit/res, domestic corp, only one class of stock

Accumulated Adjustment Account (AAA)

undistributed income and loss items for which the shareholders have already been taxed so that distributions can be distinguished between those that are taxable to shareholders and those that are distributions of income that have already been taxed. Amounts received out of AAA are not taxable when distributed.

3 income categories for QBI

1 - below threshold = QBI deduction fully deductable 2 - between threshold & upper limit = wage/ppty limit partial (if no qual bus, another reduction applies) 3 - upper limit = full wage/ppty limit and must be qualified business

Distributions to shareholders s status, first comes from CY earnings and profits then

1. AAA non-taxable reduce basis 2. AEP taxable as ordinary dividend 3. return of basis (non-taxable) 4. excess is a cap gain

The IRS requires that the annual calculation of a shareholder's S-Corporation stock basis be conducted in the following order:

1. Increased for income items, including gains; 2. Decreased for distributions; 3. Decreased for non-deductible, non-capital expenses and depletion; and 4. Decreased for items of loss and deduction.

Qualified Business Income Deduction

20% of qualified business income (QBI), subject to a Wage/Property Limitation, which is the greater of 50% of wages, or 25% of wages + 2.5% of unadjusted basis of qualified property.

Built-In Gains Tax (BIG)

A tax, calculated at the highest corporate tax rate, imposed on gains on disposals of assets that have appreciated prior to a tax-free conversion from a C corporation to S corporation status when those assets are sold within 5 years of the conversion.

Individual 25% ownership S-corp contributes $12K cash for CS AND loaned the company $10K, the company has a op loss of $120. Calculate basis and how much of the loss can the shareholder take?

Basis $12 + $10 = $22; 25% x ($120) = $30 however, a shareholder can only deduct losses to the extent of their basis

Separately Stated Items on K-1

Box 2 Net real estate income/loss Box 4 Interest Income Box 5 Ordinary & Qual dividends Box 6 royalties Box 7 ST Cap Gain/ Loss Box 8a LT Cap Gain/Loss Box8b collectibles Box 9 1231 Gain/Loss Box 10 other income Box 11 Section 179 Depreciation Box 12 Other deductions (charitable contributions) Box 14 Foreign transactions Box 15 AMT Box 16 Items affecting basis Box 17 Other

Calc stock basis to determine whether a distribution is taxable or whether a loss is deductible

Initial basis + (% of inc/loss + muni bonds +/- separately stated items) - distribution received - nondeductible exp (1/2 meals) = net basis then items of loss AND deductions (ex charitable cont) allocate proportionally to get basis to zero

Calc stock basis to determine whether a distribution is taxable or a loss deductible

Initial basis + (%inc/loss + muni bond int + sep state items) - dividend received

Separately Stated Items

Items that are reported separately on the tax return of an S corporation (1120S) because of their tax treatments, enabling shareholders to each recognize their proportionate share of each item and handle it properly on their tax returns.

Miller and Moore formed MM, Inc. as an S corporation. Each contributed $50,000 in exchange for five shares of corporate stock. In addition, MM obtained a $60,000 loan from a local bank that was still outstanding at the end of the year. In MM's first year of operation, it reported a loss of $20,000 and did not make any distributions to the shareholders. What is Miller's basis in his MM shares at the beginning of the second year?

Miller $50,000 - (50% x $20K loss) = $40,000; unlike a partnership, an S corporation's liability has no effect on shareholder basis (eg, $60,000 loan).

Qualifications for S corps

Only one class of stock, with profits and losses allocated proportionately according to ownership No more than 100 shareholders, with family members and their spouses being treated as a single shareholder, all of whom must be U.S. residents or citizens

S corp termination

Termination of a corporation's S status can be voluntary (ie, revocation) or involuntary (ie, termination for violating S requirements or having excess passive income). After waiting FIVE tax years (ie, the year of termination plus 4 full tax years), the corporation may reelect S status.

25% shareholder in an S corp, Schedule K-1: Ordinary business income $85,600 W-2 wages 102,000 Unadjusted basis of qualified property 54,000 The taxpayer has taxable income of $82,000 before the qualified business income (QBI) deduction, which includes a net capital gain of $3,000. Assume taxable income is below the Section 199A threshold amount for the year. What is the taxpayer's allowable QBI deduction?

The combined deductible amount is subject to an overall limitation, which caps the allowable QBI deduction to the LESSER of: the combined QBI deductible amount (20% x $85,600 = $17,120), or 20% of taxable income above net capital gain [$15,800 = 20% × ($82,000 taxable income before QBI deduction − $3,000 net capital gain)].

Magic Corp., a regular C corporation, ELECTED S corporation status at the beginning of the current calendar year. It had an asset with a basis of $40,000 and a fair market value (FMV) of $85,000 on January 1. The asset was sold during the year for $95,000. The corporate tax rate is 21%. What was Magic's tax liability as a result of the sale?

Think BIG C corp makes S electrion $85 - $40 = 45 unrealized built-in-gain; sale price $95 - $40 basis = $55, $10 passes through to shareholders and $45 is subject to corporate-level BIG tax so $45 x 21% = $9,450

Azmi is single and the sole proprietor of a LAW PRACTICE. This year the law practice has qualified business income of $187,500. W-2 wages were $220,000 and the unadjusted basis of qualified property is $80,000. Assume Azmi has no other income or deductions. The Section 199A threshold amount for the year is $157,500. What is Azmi's QBI deduction?

any specified service business will be treated as a qualified business, but only the "applicable percentage" 1. Applicable percentage: 100% - [($187,500 taxable income - $157,500)/$50,000] = 100% - 60% = 40%. 2. Tentative QBI: 20% x ($187,500 x 40%) = $15,000. Wage/Property Limitation—Greater of:50% × ($220,000 wages × 40%) = $44,000.(25% × $220,000 wages × 40%) + (2.5% × $80,000 × 40%) = $22,800. The Wage/Property limitation does not apply since it is greater than the tentative QBI. The answer is $15,000 Test 28 Q15

Distributions from S-corp non-taxable to the

extent of shareholder's basis

Shareholders of S-corps

must be individuals, certain trusts and estates for the benefit of individuals ok, NO CORPS, PARTNERSHIPS OR BIG TRUSTS ALLOWED AS SHAREHOLDERS. An S corporation may own shares in a C corporation or be a partner in a partnership.

muni bond interest

not taxable, increase basis

distributions received by shareholders of s-corps

reduce basis not taxed b/c when the S-corp earned the money it was taxed

Electing S Corp Status

shareholders must unanimously elect to become an S-corp

If a shareholder contributes property subject to a liability and the liability is greater than the shareholder's adjusted basis in the property...Ex. sole shareholder contributed equip FMV $20, basis $6, subject to $12 liability, what is the amt of the gain?

the shareholder must recognize a gain on the amount over the adjusted basis in the property. The gain is the excess of the liability over the basis 12 - 6 = 6