Term
| ELIGIBILITY AND ELECTION - Overview |
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Definition
| A corporation is treated as an S corporation only for those days for which each specific eligibility requirement is met and the required election is effective. |
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Term
| ELIGIBILITY AND ELECTION - Eligibility |
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Definition
a. Eligibility depends on the nature of the corporation, its shareholders, and its stock.
b. An S corporation must have only one class of stock.
c. Issuance of debt does not disqualify S corporation status.
d. The number of shareholders may not exceed 100.
e. The corporation must be domestic and eligible.
f. S corporations can own C corporations or Qualified Subchapter S Subsidiaries (QSSS). |
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Term
| ELIGIBILITY AND ELECTION - Election |
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Definition
a. An eligible corporation must make the election for S corporation status.
b. All shareholders at the time the election is made must file a consent. |
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Term
| ELIGIBILITY AND ELECTION - Termination |
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Definition
Upon the occurrence of a terminating event, an S corporation becomes a C corporation.
An S corporation election is terminated by any of the following:
1) An effective revocation. A majority of the shareholders (voting and nonvoting)
must consent.
2) Any eligibility requirement not being satisfied on any day.
3) Passive investment income (PII) termination. |
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Term
| ELIGIBILITY AND ELECTION - Termination - PII Termination |
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Definition
| PII termination occurs when, for 3 consecutive tax years, the corporation has both Subchapter C E&P on the last day and PII that is greater than 25% of gross receipts. |
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Term
| ELIGIBILITY AND ELECTION - Accounting Method |
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Definition
| An S corporation is not required to use the accrual method. |
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Term
| ELIGIBILITY AND ELECTION - Tax Year |
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Definition
| An S corporation generally must adopt a calendar tax year. |
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Term
| ELIGIBILITY AND ELECTION - Administration |
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Definition
| The tax treatment of S corporation items of income, loss, deduction, and credit is determined at the corporate level. |
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Term
| OPERATIONS - Exempt Taxes |
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Definition
Provisions that govern taxation of C corporations also govern taxation of S corporations unless a specific exception applies. S corporations are expressly exempt from the following taxes:
1) Corporate income tax
2) AMT (alternative minimum tax)
3) AET (accumulated earnings tax)
4) PHC (personal holding company) tax |
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Term
| OPERATIONS - Reported Items |
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Definition
| The items of income, deduction (including losses), and credit of an S corporation are reported by the corporation. |
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Term
| OPERATIONS - Items Separately Stated |
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Definition
S corporation items of income, deduction, and credit, which could alter the tax liability of shareholders if taken into account by them on their personal returns, are required to be stated and passed through separately. Separately stated items include
1) Sec. 1231 gains and losses
2) Net short-term capital gains and losses
3) Net long-term capital gains and losses
4) Dividends
5) Charitable contributions
6) Taxes paid to a foreign country or to a U.S. possession
7) Tax-exempt interest and related expense
8) Investment income and related expense
9) Amounts previously deducted (e.g., bad debts)
10) Real estate activities
11) Sec. 179 deduction (immediate expensing of new business equipment)
12) Credits
13) Deductions disallowed in computing S corporation income |
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Term
| OPERATIONS - Corporate Level Items |
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Definition
| Items not required to be separately stated (e.g., organizational costs) are combined at the corporate level, and a net amount of ordinary income or loss is passed through to shareholders. |
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Term
| OPERATIONS - Amortizable Items |
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Definition
Shareholders (who are individuals) may elect to deduct ratably the expenses incurred during the tax year for:
1) Research and experimentation costs (over a 10-year period)
2) Mining exploration and development costs (over a 10-year period)
3) Increasing the circulation of a periodical (over a 3-year period)
4) Intangible drilling costs (over a 5-year period) |
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Term
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Definition
| The amount of each item that each shareholder takes into account is computed on a per-day and then a per-share basis. A shareholder’s holding period does not include the date of acquisition but does include the date of disposition. All allocations are made on a per-share, per-day basis. |
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Term
| OPERATIONS - IRS Reallocation |
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Definition
| Pro rata shares of S corporation items passed through may be reallocated by the IRS among shareholders who are members of the same family. |
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Term
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Definition
| The shareholder characterizes each item as the corporation would. |
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Term
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Definition
Carryovers (e.g., NOL) between S and C corporations are permitted with limitations.
This applies to corporations that change their status from C to S or from S to C. |
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Term
| OPERATIONS - Employee Fringe Benefits |
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Definition
A person who directly or by attribution owns more than 2% of the stock of an S corporation (voting power or amount) on any day during its tax year is not considered an employee entitled to employee benefits (i.e., they are employee-owners, not employees).
The S corporation must treat an amount paid for fringe benefits as deductible compensation, and the shareholder must include the amount in gross income. |
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Term
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Definition
An individual is considered as owning the stock directly by or for
1) The individual’s spouse (other than a legally separated spouse)
2) The individual’s children, grandchildren, and parents
Generally, if a shareholder purchases stock, the shareholder’s original basis in the stock is its cost. |
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Term
| OPERATIONS - At-Risk Rules |
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Definition
At-risk rules are applied at the shareholder level.
1) If the shareholder’s pro rata share of passed-through losses exceeds his/her amount at risk at the close of his/her tax year, the excess is not deductible.
a) The excess is suspended and carried forward indefinitely.
b) It is deductible when the shareholder’s amount at risk has increased. |
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Term
| OPERATIONS - Passive Activity Loss Rules |
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Definition
| Current deductibility of any passive activity losses passed through is limited, at the shareholder level, to passive activity income. |
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Term
| OPERATIONS - Failure to File Penalty |
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Definition
| The penalty is imposed in the amount of the number of persons who were shareholders during any part of the year, multiplied by $195 for each of up to 12 months (including a portion of one) that the return was late or incomplete. |
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Term
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Definition
Distributions include nonliquidating and liquidating distributions of money or other
property but not of the S corporation’s own stock or obligations. The amount of a
particular distribution is the sum of any money plus the FMV of property distributed. |
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Term
| DISTRIBUTIONS - Shareholder Accounts |
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Definition
S corporations are required to maintain records, with respect to each shareholder, referred to as
1) Accumulated adjustments account (AAA)
2) Other adjustments account (OAA)
3) Previously taxed income account (PTI account) |
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Term
| DISTRIBUTIONS - Distributions of Property |
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Definition
a. An S corporation recognizes gain realized on the distribution of appreciated property (FMV > basis).
b. The amount and character of the gain and its treatment are determined as if the distributed property were sold to the shareholder at its FMV. |
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Term
| DISTRIBUTIONS - Shareholder Treatment |
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Definition
Shareholder treatment of distributions from the S corporation is determined at the end of the S corporation’s tax year. The AAA, OAA, bases in shareholders’ stock, and basis in corporate-
shareholder debt must be adjusted for the S corporation’s items of income, deduction, etc., before each shareholder determines the proper treatment of his/her distributions. |
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Term
| SPECIAL TAXES - Passive Investment Income (PII) Tax |
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Definition
| An S corporation with Subchapter C E&P at the close of its tax year and more PII than 25% of its gross receipts is subject to a tax of 35% of excess net passive income. |
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Term
| SPECIAL TAXES - Built-In Gains (BIG) Tax |
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Definition
| An S corporation that, upon conversion from C to S status, had net appreciation inherent in its assets is subject to tax of 35% on net gain recognized (up to the amount of built-in gain on conversion) during the recognition period. |
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Term
| SPECIAL TAXES - LIFO Recapture |
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Definition
| Any excess of the FIFO inventory value over the LIFO inventory value at the close of the last tax year of C corporation status is gross income to a corporation that used the LIFO method to inventory goods. |
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Term
| SPECIAL TAXES - General Business Credit Recapture |
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Definition
| An S corporation remains liable for any recapture attributable to credits during C corporation tax years. |
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Term
| DISTRIBUTIONS - AAA Account |
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Definition
| Accumulated adjustments account |
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Term
| DISTRIBUTIONS - OAA Account |
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Definition
| Other adjustments account |
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Term
| DISTRIBUTIONS - PTI Account |
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Definition
| Previously taxed income account |
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