UCF School of Accounting Tax 5015

1 / 18

# UCF School of Accounting Tax 5015 - PowerPoint PPT Presentation

UCF School of Accounting Tax 5015. S Corporations Chapter Twelve. Learning Objectives. Explain the requirements for being taxed under Subchapter S Calculate ordinary income or loss Calculate amount of any special S tax levies

I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.

## PowerPoint Slideshow about 'UCF School of Accounting Tax 5015' - ostinmannual

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.

- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript

### UCF School of AccountingTax 5015

S Corporations

Chapter Twelve

Learning Objectives
• Explain the requirements for being taxed under Subchapter S
• Calculate ordinary income or loss
• Calculate amount of any special S tax levies
• Calculate S/H allocable share of ordinary income/loss and separately stated items
• Determine limitations on a S/H deduction of S corp losses
• Calculate a S/H basis in S Corp Stock and Debt
• Determine taxability of S Corp distributions to S/H
Sub S Requirements
• The shareholders -
• must number no more than 75 (100 after 12/31/2004);
• After 12/31/2004, family members treated as 1 shareholder
• Members of family defined as: common ancestor, lineal descendants of common ancestor, and spouses of lineal descendants or common ancestor. Maximum of 6 generations.
• must be individuals, estates, certain types of trusts, and certain types of tax-exempt organizations;
• must be U.S. citizens or resident aliens.
Sub S Requirements
• The corporation -
• must be a domestic corporation;
• Unincorporated entities that “check the box” to be treated as corporation are also eligible.
• must not be an “ineligible” corporation;
• Corporations that have special status can not be S corp (e.g. financial institutions, insurance companies)
• Corporations that have elected special Puerto Rico and US possession tax credit or special Domestic International Sales Corp tax exemption
• must have only one class of stock
• This provision may get complicated for unincorporated “check the box” entities
The Election
• Form 2553 must be filed no later than the 15th day of the 3rd month for year election is to be effective.
• Tax year begins on the first day on which it acquires assets, has shareholders or begins business.
• Each shareholder of a new corp must consent.
• S election exempts corp from all federal income taxes except:
• built-in gains tax
• excess net passive income tax
• LIFO recapture tax
• Recapture of previously claimed ITC
Termination of the Election
• The election is terminated when:
• the corporation either voluntarily revokes the election
• Filed during first 2 1/2 months of taxable year
• Consented to by a majority of shareholders
• The corporation ceases to meet the small business corporation requirements:
• exceeding 75 (100) shareholder limit
• having an ineligible shareholder own stock
• second class of stock
• retaining a prohibited tax year
• failing the passive investment income test for 3 consec. years
Passive Income Test
• IF S Corp’s Passive Income exceeds 25% of total gross receipts for 3 consecutive years; AND
• S Corp has C Corp E&P;
• THEN S Corp election terminated beginning of 4th year.
• Passive Income: gains from sale of securities, royalties, rents, dividends, interest, and annuities.
S Corp. Operations
• S Corp.’s make same accounting period and accounting method elections as C Corp’s.
• Tax Year - usually calendar year
• Although business purpose exception is allowed
• Accounting Methods
• Most elections made by S Corp
• Exceptions: same as partnership’s - discharge of indebtedness, mining exploration expenditures, FTC
Reporting of S Corp. Income
• Ordinary Income or Loss
• Separately stated items (same as partnership)
• Special Rules
• Amortization of organizational expenditures allowed
• Accrued expenses owed to S. Corp S/H not deductible by S Corp until S/H reports income
• S/H’s may be employees, however those owning more than 2% of stock are not eligible for tax-free fringe benefits
• Generally, no Carryback or Carryover of losses or deductions between an S Corp and a C Corp
• Sec 291 Recapture applies ONLY if S Corp had been C Corp in any of its three preceding tax years.
Shareholder’s AllocationsPer Day/Per Share
• Each shareholder is allocated a pro rata portion of ordinary income (loss) and all separately stated items
• If stock holdings change during year, shareholder is allocated a pro rata share of each item for each day
• No special allocations are allowed
• No pre-contribution gain rules apply
Loss Limitations
• Both ordinary and separately stated loss amounts are “passed” through to the shareholders.
• The shareholder’s deduction is limited to:
• s/h’s adjusted basis in the stock
• plus the adjusted basis of debt owed by the corporation to the shareholder.
• The Sec. 465 at-risk rules are applied at the shareholder level.
• Passive activity rules apply. The shareholder must personally meet the material participation standard to avoid the passive activity limitation.
• The Sec. 183 “hobby loss” rules apply
• Stock
• Initial investment (or basis at beginning of year)
• Plus:
• Share of ordinary and sep.stated income and gains
• Minus (in order):
• S Corp Distributions (not out of C Corp E&P)
• Non-deductible expenses not chargeable to capital
• Share of ordinary and separately stated losses
• Equals: Adjusted Basis of S Corp stock
• Debt
• decrease for losses if stock basis reduced to zero
• increase for ord inc and/or sep. stated. gains up to original basis
S Corp Distributions:no C Corp E&P present
• Consequences to Shareholder
• Reduce Basis in Stock
• Distributions in Excess of Basis are Capital Gain
• S/H takes FMV basis in distributed property
• Consequences to S Corp
• Must recognize gain on distribution of appreciated property
• Can not recognize losses
S Corp Distributions:S Corps with C Corp E&P
• Cash Distribution:
• AAA (Tax Free up to S/H’s Basis in Stock)
• PTI (Tax Free up to S/H’s Basis in Stock)
• Accumulated E & P (Taxable)
• Other Adjustments Account (Tax-Free up to S/H’s Basis in Stock)
• Basis of Stock (Tax Free)
• Capital Gain on Sale of Stock Once Basis Reduced to Zero
• Property Distribution: same rules as for cash distributions except:
• Gain recognized by S Corp on distribution of appreciated property
• Shareholder takes a FMV basis in distributed property
AAA Account
• Accumulated Adjustments Account: represents cumulative income/loss recognized in post-1982 S Corp years.
• Computed as follows:
• Beginning of Year AAA Balance
• Plus:
• ordinary income
• separately stated income items (not tax-exempts)
• Minus (IN ORDER):
• expenses that are not deductible in determining ord. Income
• Ordinary loss
• separately stated deduction and loss items (not tax-exempt)
• distributions made during year from AAA
• Equals: End of Year AAA Balance
• Note: if net adjustments (not including distributions) is negative, then distributions are deducted first (before any other adjustments).
OAA Account
• Other Adjustments Account (OAA) maintained only by corps having accumulated E&P at year end
• Computed as follows:
• Beginning of year OAA Balance
• Minus:
• Expenses incurred in earning tax-exempt interest
• Distributions from OAA
• Federal taxes paid by S Corp that are attributable to C Corp tax years
• Equals: End of year OAA Balance
Excess Net Passive Income Tax
• If S Corp’s Passive Investment Income exceeds 25% of its gross receipts AND
• it has C Corp E & P at close of tax year
• THEN S Corp pays tax on excess net passive income at 35%
• Recall that Passive income was defined previously as: gains from sale of securities, royalties, rents, dividends, interest, and annuities
• Net Passive Income = Total passive income less deductions directly connected
• Excess Net Passive Income =
• Net Passive Income x [(Passive Investment Income - 25% of gross receipts)]/Passive Investment Income
• Income passed through to shareholders is reduced by the amount of the tax
Built-in Gains Tax
• C Corp Converting to an S Corp incurs corporate level tax on any built-in gains when asset disposed of at a gain within 10 years of conversion.
• Tax applies to any asset disposition (e.g. accounts receivable, inventory, real estate, etc).
• Tax levied at 35% on the lesser of:
• Built-in gains recognized for tax year
• Taxable income (computed as if C corp, ignoring DRD and NOL)
• Net unrealized Built-in gains at conversion less total recognized built-in gain for prior tax years
• Tax not levied if asset acquired after 1st day of S status
• Built-in Gains Tax reduces amount of regular gain pass through to S Corp S/H’s from sale of assets