S Corporations Overview

These flashcards cover key concepts relating to S Corporations, including election requirements, taxation, loss limitations, distributions, and shareholder responsibilities.

What are the learning objectives for S Corporations?

To describe qualifications, terminations, operating issues, tax rules, and distributions related to S Corporations.

What is required for an entity to elect S Corporation status?

The entity must be a corporation, have 100 or fewer shareholders, meet shareholder eligibility, and have one class of stock.

Can a corporation be a shareholder in an S Corporation?

No, S Corporations cannot have corporations as shareholders.

How many shareholders can an S Corporation have?

An S Corporation can have a maximum of 100 shareholders.

What is a Voluntary Termination of S Corporation status?

It occurs when shareholders owning more than 50% elect to terminate S Corporation status.

What triggers an Involuntary Termination of S Corporation status?

Failing to meet S Corporation requirements, such as exceeding passive investment income limits.

What is the allocation method for income in an S Corporation?

Income is allocated pro rata based on shares owned each day of the year.

What is the consequence of distributing appreciated property from an S Corporation?

The S Corporation recognizes gain on the distribution of appreciated property.

What is the difference between ordinary business income and separately stated items?

Ordinary income is operational income while separately stated items are specific income types delineated on tax forms.

What is the tax basis of a shareholder in an S Corporation?

The basis is the initial investment plus adjustments for income, losses, and distributions.

What are the tax implications for distributions from an S Corporation with earnings and profits (E&P)?

Distributions from E&P are taxed as dividends, while returns of basis are tax-free.

How is a property's FMV treated in an S Corporation distribution?

The FMV of property received increases the stock basis of the shareholder.

What are the estimated tax requirements for S Corporations?

S Corporations with federal tax liabilities of $500 or more must make quarterly estimated tax payments.

What is the limit on losses for shareholders of S Corporations?

Losses are limited to the shareholder's tax basis in the stock and loans to the corporation.

What is the At-Risk Limitation in relation to S Corporations?

Shareholders may only deduct losses to the extent of their at-risk amounts.

What is the treatment of suspended losses in the context of S Corporations?

Suspended losses cannot be deducted until additional basis is created.

What are the fringe benefit rules for S Corporation shareholders?

Shareholders owning 2% or less receive nontaxable benefits; those owning more than 2% may have taxable benefits.

What is meant by the term "Passive Investment Income" in S Corporations?

Income derived from non-operational activities like rents, dividends, or royalties.

How does the built-in gains tax apply to S Corporations?

It applies if the S Corporation has unrealized gains at conversion and recognizes gains within five years.

What types of distributions do S Corporations make?

Operating distributions, liquidating distributions, and property distributions.

How does the Passive Activity Loss Limitation affect S Corporation shareholders?

Shareholders can only deduct losses if they are actively involved in the S Corporation.

What happens during the Post-Termination Transition Period regarding losses?

Suspended losses can be utilized if stock basis is created during this period.

What is an S Corporation's reporting obligation for tax purposes?

S Corporations must file Form 1120-S by the 15th day of the third month following the end of the tax year.

How do Liquidating Distributions work in an S Corporation?

S Corporations recognize gains or losses on the distribution of their assets.

What tax rate applies to Excess Net Passive Income in S Corporations?

The tax is levied on the excess passive income calculated based on defined formulas.

What is AAA in relation to S Corporations?

Accumulated Adjustments Account (AAA) tracks the accumulated earnings of the S Corporation for distribution purposes.

What is the IRS guideline for the Tax year of an S Corporation?

Generally, S Corporations must adopt a calendar year as their tax year.

What happens if an S Corporation has E&P when making distributions?

Distributions from E&P are taxed as dividends, while distributions in excess of basis are capital gains.