Ch. 11 Flash Cards

Front 1

Most corporations in SC are?

Back 1

S Corps i.e. Miliken

Front 2

S Corps are taxed like a?

Back 2

Partnership, ie..Flow Through Entity

Front 3

For legal and business purposes S corps are treated like?

Back 3

Corporations

Front 4

S corps use corporate tax rules regarding?

Back 4

Formations, liquidations, and non taxable reorganizations instead of the partnership rules

Front 5

What are the Shareholder Requirements for a S Corp?

Back 5

1. The corporation must not have more than 100 shareholders.
2. All shareholders must be individuals, estates, certain tax-exempt organizations, or certain kinds of trusts.
3. None of the individual shareholders can be classified as a non resident alien

Front 6

100 Shareholder Rule

Back 6

1. Members of a family including estates count as one family member
2. Members of a family include the common ancestor, lineal descendants of the common ancestor, and estates of family members
3. If they are more than 6 generations removed from the youngest generation of family member shareholders

Front 7

Eligible Shareholders

Back 7

Organizations exempt from income tax can hold S corporation stock, and each such organization counts as one shareholder when calculating the 100 shareholder limit. S corps can use as a charitable contribution

Front 8

Alien Individuals

Back 8

Individuals who are not US citizens can own S corporation stock only if they are US residents or are married to a US citizen resident alien and make an election to be taxed as a resident alient

Front 9

Corporation Related Requirements for S Corp

Back 9

1. The corporation must be a domestic corporation or unincorporated entity that elects to be treated as a corporation
2. The corporation must not be an "ineligible" corporation
3. The corporation must have only one class of stock

Front 10

2 Ways that an S Corp Can Be Ineligible

Back 10

1. Corporations that maintain a special federal income tax status are not eligible to make an S election. i.e. banks that use reserve method to account for bad debts
2. Corporations that have elected the special Puerto Rico and US possessions tax credit or that had elected the special Domestic International Sales Corporation tax exemption are ineligible to make the S election

Front 11

Can an S Corp have 2 classes of stock?

Back 11

Yes if the difference is voting rights

Front 12

Can S corporations that own stock of C corporation participate in the filing of a consolidated tax return?

Back 12

No they cannot

Front 13

Qualfied Subchapter S Subsidiary (QSub)

Back 13

A QSub is a domestic corporation that qualifies as an S corporation, is 100% owned by an S corp, and for which the parent S corp elects to treat the sub as a QSub

Front 14

If debt meets the requirements?

Back 14

It means that is straight debt

Front 15

3 Ways an S election affects Shareholders

Back 15

1. Shareholders report their pro rata share of the S corps ordinary income or loss as well as separately stated items
2. Shareholders treat most distributions as a nontaxable recovery of their stock investments
3. Shareholders stock bases are adjusted for the shareholders ratable share of ordinary income or loss and any separately stated items

Front 16

When can existing corporations make an S election?

Back 16

Can make a timely S election at any time during the tax year preceding the year for which the election is to be effective or before the fifteenth day of the third month of the year

Front 17

Relief for improper elections

Back 17

If the coropration misses the deadline for making the S corporation election, the IRS can treat the election as timely made if the IRS determines that the corporation had reasonable cause for making the late election.

Front 18

Consent of the Shareholders

Back 18

Each person who is a shareholder on the elction date must consent to the election.

Front 19

Termination of the Election

Back 19

Need 50% or greater consent

Front 20

Revocation of the Election

Back 20

Shareholders owning more than one-half the corporations stock on the day the corporations makes the revocation must consent to the revocation

Front 21

How many years cannot you not become an S corp after its election is revoked?

Back 21

5 years

Front 22

Events that can terminate the election include

Back 22

1. Exceeding the 100-shareholder limit
2. Having an ineligible shareholder own some stock
3. Creating a second class of stock
4. Attaining a prohibited tax status
5. Selecting an improper year
6. Failings the passive investment tincome test for three consecutive years

Front 23

Inadvertent Termination

Back 23

Ceasing to be a small business corporation or by its failing the passive investment income test for three consecutive years

Front 24

What can a termination of an S election potentially do?

Back 24

Increase corporate or shareholder taxes

Front 25

Avoiding Termination of an S Election

Back 25

1. Monitor all transfers of S Corp stock
2. Establish procedures for the S corp to purchase the stock of deceased shareholderes to avoid the stock being acquired by an ineligible trust
3. Establish restrictions on the traferability of the S corp stock by having shareholders enter into a stock purchase agreement

Front 26

Taxable Year

Back 26

1. A tax year ending on December 31st
2. Any fiscal year for which the corporation establishes a business purpose

Front 27

Section 444

Back 27

Permits an S corp to elect a fiscla year other than a permitted year. Must have deferral period of thee monthes or less

Front 28

Accounting Method Elections

Back 28

Made independent of accounting methods elected by shareholders
1. Section 108 related to income from dischage or indebtness
2. Section 617 election related to deduction and recapture of mining explorations expenditures
3. Section 901 election to take a credit for foreign income taxes

Front 29

Ordinary Income or Loss Separately Stated Items

Back 29

1. Net short-term capital gains and losses
2. Net long-term capital gains and losses
3. Sec. 1231 gains and losses
4. Charitable contributions

Front 30

Deductions that Cannot Be Claimed by S Corps

Back 30

1. The 70, 80, or 100% dividends received deduction
2. The US Production Activities Deduction
3. The same deductions disallowed to a partnership under section 703

Front 31

Similarity to a C Corporation Treatment

Back 31

20% reduction in certain tax preference benefits under Section. 291 applies to an S corporation if the corporation was a C corp in preceding years

Front 32

Carryovers and Carrybacks When Status Changes

Back 32

No carryovers or carrybacks that originate in a C corporation tax year can carry to an S corporation tax year other than carryovers that can be used to offset gains tax. Same goes for S corp to C Corp carryovers, losses pass to the shareholder and if greater than shareholders can create an NOL carryover in future years

Front 33

Excess Net Passive Income Tax Rate

Back 33

Equals the S corps excess net income times the highest corporate tax rate

Front 34

When does a S corp have special taxes?

Back 34

After it elects to become an S corp after being a C Corp

Front 35

Built-In Gains Tax

Back 35

Applies to any income or gain the corporation would have included in gross income while a C corporation had the corporation used the accrual method of accounting and the corp reports during 7 year period begning on the date the S election took effect

Front 36

What are 3 taxes that maybe paid at corporate level made as an S election?

Back 36

Built In Gains, Excess Net Passive Income, LIFO Recapture

Front 37

LIFO Recapture Tax

Back 37

If a C corp using LIFO makes an S election, it is required to include its LIFO recapture amount in gross income for its last C year. Amount is the excess of the inventory basis for tax purposes under FIFO over its basis under LIFO at the final C corp year. S corps inventory basis is craesed by the LIFO recapture amount

Front 38

Income Allocation Procedures

Back 38

1. Allocating an equal portion to each day in the tax year
2. Allocating an equal portion of the daily amount to each share of stock outstanding on each day
3. Totaling the daily allocations for each share of stock
4. Totaling the amounts allocated for each share of stock held by the shareholder

Front 39

Special Election Dividing the S Corps Tax Year

Back 39

1. The day the shareholders interest in the corporation terminates
2. The last day of the S corporations tax year

Front 40

Allocation of the Loss

Back 40

Losses pass through to the shareholders. Excess may create an NOL for the shareholder and result in a carryback or carryover

Front 41

Shareholder Loss Limitations

Back 41

Each shareholders deduction is limited to the sum of the adjusted basis for S corp stock + adjusted basis of any indebtness owed directly by S Corp to shareholder. Shareholder cannot increase his or her stock basis by a ratable share of the general S corp liabilities

Front 42

What do Shareholder Loss Limitations ultimately do?

Back 42

Reduce amount of loss you can take

Front 43

Guarenteed Loans

Back 43

Do not create corporate indebtness. Shareholders loss limitation doesnt increase until shareholder pays some or all of liability or executes a not at the bank. Converts guaretnee into a indebtness of corp to shareholder and icnreases shareholders debt basis and loss limitation

Front 44

Special Shareholder Loss and Deduction Limitations

Back 44

1. At Risks Rules
2. Passive Activity Limitation Rules
3. Hobby Loss Rules

Front 45

What happens if a shareholder sells S corp stock and has unused loss?

Back 45

Losses don't transfer to new shareholder. Instead unused losses lapse. If shareholder transfers stock to a spouse or or former the losses transfer.

Front 46

Family S Corps

Back 46

Important in tax planning. Involves high-tax-bracket tax payer gifting stock to a minor child who generally has little income.

Front 47

What can the IRS do in Family S Corps?

Back 47

Has the authority to adjust the income, loss, deduction, or credit items allocated to a family memebr to reflect the value of services rendered or capital provided. Permits the reallocation of income to provide for full compensation.

Front 48

Basis Adjustments to S Corps

Back 48

Must adjust their S corp stock basis annually

Front 49

Basis Adjustments to Shareholders Debt

Back 49

After shareholders basis in S corp stock is reduced to zero, basis in any S corp indebtness is reduced by the remainder of available loss and deduction items. If a shareholder has more than one loan outstanding at year end, the basis reduction applies to all indebtedness based on relative adjusted basis of each loan

Front 50

Repayment of a Shareholder Indebtness

Back 50

Gain recognized to the shareholder if payment amount exceeds debt's adjusted basis. If secured by a note, the difference is capital gain. If not secured by a note then it is ordinary income.

Front 51

Corporations Having No E&P

Back 51

If distribution exceeds shareholders stock basis, the shareholder treats the excess as a gain from the sale of stock

Front 52

What happens if a S corp distributes appreciated property to shareholders?

Back 52

S corp recognizes gain as if it sold the property. Becomes part of ordinary income or is passed through as a separately stated item. Corp doesnt recognize a loss if property has declined in value.

Front 53

Corporations Having Accumulated E&P

Back 53

1. Prior Rules
2. Current Rules
3. Money Distributions

Front 54

Post Termination Transition Period

Back 54

Nontaxable distributions of money made during the S corps post-termination transtion period can be made to those shareholders who owned S corp stock on termination date.

Front 55

Transactions Involving Shareholders And Other Related Parties

Back 55

Related party transaction rules deny a payor a deduction for an expense paid to a related payee when a mismatching of the expense and income item occurs because of differences in accounting methods.

Front 56

Fringe Benefits Paid to A Shareholder-Employee

Back 56

S corporation is not treated as a corporate taxpayer with respect to many fringe benefits paid to 2% shareholders. Treated as partnership and 2% shareholder is treated as a partner. Fringe benefits paid to 2% shareholder-employee of a S corp are taxable as compensation and deductible by the corp if benefit is not excludable from shareholders gross income.