REG_5_01

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  1. What are the tax rules for a tax-free contribution of property to an S-Corp?
    • The event is tax-free, just like forming a C-Corp, if it is a
    • Contribution of property (assets or money) and not services
    • Solely in exchange for stock, and
    • After the transfer, the shareholder(s) have control of the corp through 80% stock ownership
  2. What are the tax consequences of property contributions to an S-Corp in exchange for stock that do not result in 80% ownership?
    The transfer is treated as a taxable sale with gain/(loss) recognized by the new shareholder.
  3. What is the basis of property received from a transferor in a tax-free exchange for stock?
    • The greater of
    • ++ the adjusted basis, plus any gain recognized by the transferor OR
    • ++ debt assumed by the S-Corp (transferor may recognize gain to prevent a negative basis)
  4. What is the basis of property received from a transferor in a non-tax-free exchange for stock?
    The FMV
  5. What are the requirements to qualify as an S-Corp?
    • Must be a domestic corp.
    • The S-Corp may own any portion of a C-Corp (even 100%), but must not file a consolidated return
    • Shareholders can include: individuals, estates, trusts, qualified retirement plans, 501(c)(3) orgs, grantor, or voting trust
    • Shareholders can NOT include: corporations, partnerships, and non-resident aliens.
    • There may not be more than 100 shareholders, but family members may elect to be treated a one shareholder.
    • There can only be one class of stock, even if differences in voting rights. Preferred stock is not permitted.
  6. True / False: S-Corps pay tax at the corporate level.
    • Generally False, Except
    • Tax consequences are passed through to the shareholders, whether or not they receive a distribution from the S-Corp.
    • Except:
    • LIFO Recapture Tax
    • Built-in Gains Tax
    • Tax on Passive Investment Income
  7. What is the LIFO Recapture Tax imposed on an S-Corp?
    When a company first operates as a C-Corp, and it uses LIFO for inventory tracking, and then elects to be treated as an S-Corp, the C-Corp must include in taxable income for the last C-Corp year the excess of inventory computed under FIFO over LIFO on a cumulative basis. The resulting tax is paid in 4 equal installments, the first of which is due with the final C-Corp return, and the remainder paid by the S-Corp.
  8. Describe the Built-in Gains Tax imposed on an S-Corp: When is it imposed? How much is the tax?
    • A C-Corp turns into an S-Corp and the basis of the assets is less than FMV
    • The S-Corp later sells or distributes the asset for a gain.
    • The S-Corp is taxed at 35% of the of the lesser of:
    • ++ the built-in gain (FMV at date switched to S-Corp minus book value on same date) less any previously recognized gain OR
    • ++ the taxable income of the S-Corp as if it were a C-Corp
  9. Describe the exemptions that can be used to avoid the Built-In Gains Tax that could be imposed on an S-Corp?
    • If the S-Corp was never a C-Corp (no built-in gain occurred in transfer because there was no transfer)
    • The sale occurred 10 years after S-Corp election
    • The asset’s appreciation occurred after S-Corp election
    • The asset itself was acquired after S-Corp election
    • The built-in gain was recognized in previous years
  10. Describe the Passive Investment Income Tax imposed on an S-Corp: When is it imposed? How much is the tax?
    • The tax is 35% on the lesser of
    • ++ Net income OR
    • ++ Excess passive investment income IF the following 2 conditions are met
    • ++++ The S-Corp has accumulated earnings attributable to prior periods in which the entity was a C-Corp AND
    • ++++ The passive investment income exceeds 25% of gross receipts
  11. What items are considered passive income?
    • Royalties
    • Dividends
    • Interest
    • Rents
    • Annuities
    • But NOT gains on sales of securities
  12. Ordinary income of an S-Corp is allocated to shareholders via a K-1 on which basis?
    • Per-share owned, on a per-day basis
    • This is important when shares have been sold part-way through the year.
  13. How is the shareholder’s basis in an S-Corp determined? What is excluded?
    • The adjusted basis in the stock
    • Loans made by a shareholder directly to the S-Corp. A nonrecourse loan (the shareholder is not personally liable) increases basis, but not the at-risk amount. Loans made by the S-Corp with a bank do NOT increase basis.
    • Not included: shareholder guarantees b/c guarantees are to a bank, but the loan is made by the S-Corp.
  14. True / False: A shareholder takes out a loan from a bank. The shareholder then takes the loan money and makes a separate loan directly with the S-Corp. The shareholder's loan will add to his basis.
    • True
    • If the S-Corp had made the loan with the bank, it would not add to the shareholder's basis, but making a loan with the shareholder does.
    • The S-Corp must then pay the shareholder, and the shareholder then pays the bank.
  15. How is the at-risk amount in an S-Corp determined?
    • INCREASES TO AT-RISK AMOUNT
    • Generally it is equal to the shareholder’s stock and direct-loans. A nonrecourse loan does NOT increase the at-risk amount. A recourse loan DOES increase the at-risk amount.
    • Plus contributions of cash or other property to the S-Corp
    • Plus the allocable share of income undistributed
    • DECREASES TO AT-RISK AMOUNT
    • Allocable share of losses
    • Distributions of cash or other property
  16. What amount of S-Corp loss may a shareholder deduct from personal taxes?
    The lesser of the basis in the S-Corp, or the shareholder’s at-risk amount
  17. When are fringe benefits deductible vs not deductible to the S-Corp?
    • Deductible: for non-shareholder employees and those employee shareholders owning 2% or less of the S-Corp
    • Not-Deductible: for employee shareholders owning >2% of the S-Corp unless the benefits are included in W-2 income
  18. What is the Accumulated Adjustments Account used for? What is the balance at the inception of the S-Corp?
    • The AAA tracks earnings and profits (retained earnings) of the S-Corp since inception, and then distributions paid to shareholders.
    • The balance at S-Corp inception = $0 (b/c the S-Corp hasn’t earned any money)
  19. What items increase the Accumulated Adjustments Account?
    • Separately and non-separately stated income and gains EXCEPT
    • tax-exempt income and certain life insurance proceeds
  20. What items decrease the Accumulated Adjustments Account?
    • Corporate distributions, but distributions cannot reduce the balance of the AAA below zero.
    • Corporate expenses and losses. (A corp operating loss can reduce AAA below zero.)
  21. An entity first operated as a C-Corp, and then elected to become an S-Corp. The C-Corp had a positive earnings and profits (E&P=retained earnings) balance. Distributions are now being made to shareholders by the S-Corp. In what order and from which accounts are distributions made?
    • 1st: from the AAA balance until depleted (tax-free distribution to shareholders)
    • 2nd: from the carryover C-Corp E&P until depleted (shareholders taxed as dividend income)
    • 3rd: as return of capital until basis depleted
    • 4th: as a capital gain distribution (long-term if held >1 yr, otherwise short-term)
  22. Why are distributions to shareholders made from the Accumulated Adjustments Account tax-free?
    Because the shareholders paid tax when the income was created and are receiving a distribution on an amount that was already taxed.
  23. An S-Corp elects to liquidate. What are the tax implications to the S-Corp and its shareholders?
    • The S-Corp must recognize gain/(loss) on the distribution of property as if it were sold at FMV. The gain/(loss) is passed as an adjustment to shareholder basis.
    • Distributions to shareholders are treated as a sale of their stock (property received = stock sold) and gain/(loss) recognized
    • ++ (Cash + FMV of property received) – liabilities assumed – stock basis = taxable gain/(loss)
    • ++ The taxaable gain/(loss) may be considered a capital gain/(loss) to the shareholder
  24. Other than a decision to voluntarily terminate the S-Corp, what other events could force the termination of an S-Corp?
    • It does not meet the qualifications of an S-Corp, including
    • ++ sale of stock to a C-Corp or foreign investor
    • ++ the 3-strike rule: >25% of gross receipts come from passive income AND the S-Corp has C-Corp E&P at the end of each year, for 3 consecutive years
  25. True / False: S-Corp debt increases shareholder basis
    • FALSE
    • Only loans directly from the shareholder to the S-Corp increase that shareholder’s basis. A nonrecourse direct loan will increase basis, but not at risk amount.
  26. What is the order in which a shareholder’s basis in and distributions from an S-Corp are calculated?
    • [1] Shareholder basis to date
    • [2] Increase for income items or excess depletion
    • [3] Decrease for distributions. If the basis is -0- STOP. No additional loss can be taken.
    • [4] Decrease for non-deductible, non-capital expenses and depletion, and
    • [5] Decrease for items of loss and deduction
  27. An S-Corp has both voting and non-voting common stock. What mixture of types of stock, and percentage of stockholders is required to revoke the S-Corp status?
    >50% of the shares held, regardless of whether voting or non-voting, and any combination of the two

Card Set Information

Author:
BethG
ID:
334915
Filename:
REG_5_01
Updated:
2017-11-03 15:33:04
Tags:
REG TAX
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Description:
Becker Review 2017
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