Income Tax 2 - Ch 22 S-Corps

S-Corp formation is subject to the same rules are C-Corps. If they meet ______ requirements, ________ governs.

Section 351

Section 351 Requirements

1. Exchange of Property (not services) for

2. Stock

3. With greater than 80% control.

4. (Corps have no gain/loss recognized!)

S-Corp Initial SH Basis in Shares Formula

Initial SH Basis =

+ cash contributed to S-Corp by SH

+ tax basis of Property Contributed by SH

- Liability Relief

+ gain recognized

- loss recognized

- FMV Boot

+ FMV Services

S-Corps are limited in the ______ and _______ of owners.

Type, Number.

Who can be S-Corp SHs?

Only US Citizens/Residents, Trusts, and Tax Exempt Organizations

Who can NOT be S-Corp SHs?

Partnerships and Corporations

S-Corp SH Number Limit

No more than 100 SHs

Up to 6 generations of Family Members and their estates count as _______

One Owner

How many classes of stock do S-Corps have?

One.

All shares have identical distribution and liquidation rights, but voting rights can differ.

S-Corps must be a _______ corporation.

Domestic

To Elect S-Corp Status:

1. File Form 2553 by the 15th day of the 3rd month for current year validity.

2. All SHs must consent and meet requirements each day of the year OTHERWISE

3. Effective 1st day of following year.

Voluntary Termination of S Election Requires:

Greater than 50% SH consent.
To be valid for the current year, must elect termination by 15th day of 3rd month; otherwise, effective 1st day of following year.

Involuntary Termination from a failure to meet S-Corp requirements is

Effective Immediately,

Involuntary Termination with Earnings/Profits from Prior C-Corp Years

Passive investment income can NOT exceed 25% of gross receipts for 3 consecutive years.

If Passive Investment Income exceeds 25% of gross receipts for 3 consecutive years,

Termination is effective on the 1st day of Year 4.

What is included in Passive Investment Income?

Gross receipts from:

Annuities, Royalties, Dividends, and Interest Income

(Does NOT include Capital Gain)

Gross Receipts are:

The total amount of Gross Revenue (Including Capital Gains before any sales allowances, returns, and discounts)

S Termination Elections often create a ______ S-Corp year and a ______ C-Corp Year.

Short, Short

What are the two allocation methods between Short Tax Years?

1. Daily Method (Default)

2. Specific Identification

These method also apply to the Sale of S-Corp Shares

Specific Indentification Election Requires

the Consent of all SHs

S-Corp Reelection must wait until the __________ after the tax year in which the S Election terminated.

Beginning of the 5th year

S-Corp Reelection Exceptions:

1. Greater than 50% of SHs change

2. Not reasonably within control of SHs with a substantial interest (~5%)

S-Corps use calander year unless _________

There is a business purpose otherwise.

S-Corps must allocate ______/______ based on shares outstanding for each SH each day of the year.

Profit/Loss

S-Corps must file a ________.

1120-S (Information Return)

S-Corps report ___, which is all income (loss) exclusive of _______.

OBI, Seperately Stated Items

S-Corps don’t report _______ or __________.

Guarenteed Payments, Self Employment Income

Subsequent Basis Adjustments resememble _________ basis asjustments.

Partnership

Adjusted Basis for S-Corps:

+ Increase for contributions to S-Corp

• (No Increase for SH assumption of Debt)

+ Increase for OBI and SS gain/income items (including TEI)

- Decrease for Cash Distributions (including Debt Relief)

• If Negative at this point, recognize Capital Gain

- Decrease for Non-Deductible Expense

- Decrease for Share of OBL and SS Loss/Deduction

Seperately Stated Income Items

Interest income

Investment income

Dividends (ordinary and qualified)

Royalties

Net short-term capital gain (loss)

Net long-term capital gain (loss), including unrecaptured §1250 gain

Net §1231 gain (loss)

Tax-exempt interest income

Other tax-exempt income (life insurance proceeds, Muni Bond)

Seperately Stated Deductions

§179 expense deduction

Charitable contributions

Investment interest expense

Investment expenses

Built-in gains tax

Nondeductible Expenses

50% of Meals

100% Entertainment

Fines, Penalties, Political Contributions

Life Insurance Premiums

Interest Expense money borrowed for Municipal Bonds

Nondeductible part of key employee life insurance

1st S-Corp Loss Limitation

Can’t deduct losses in excess of tax basis.
Can mitigate debt disadvantage of S-Corp Tax Basis by loaning money directly to S-Corp (Debt Basis)

For the 1st loss limitation rule, losses are first limited to the _____ basis then to the _____ basis.

Stock, Debt.

Cash distributions can’t reduce ________.

Debt Basis

For the 1st Loss Limit, If Stock and Debt basis are reduced, any subsequent year net basis INCREASE restores

debt basis first, then stock.

For the 1st Loss Limit, If Stock and Debt basis are reduced, any subsequent year net basis DECREASE affects

stock basis, then debt basis.

The At-Risk Limitation is generally the same as the _____________.

Tax Basis Limitation.

At-Risk Limitation Exception: If SH takes out _________ to contribute or loan cash to the S-Corp, the At-Risk amount becomes the _________.

1. A nonrecourse loan

2. FMV of the collateral securing the loan

The PAL Limitation is:

The Same as for Partnerships

The Excess Business Loss Limitation is:

The Same as for Partnerships