[REG] S Corporations

Eligibility requirements for an S corporation(IRS letter 받아야함)

1. Domestic corp estimated in state

2. Issue one class of stock only

3. Can be a member of an affiliated Group

    - An S corp can own a C corp

    - A C corp cannot own a S corp

4. SH of Scorp(individuals(single m LLC), Trust/Estate) Except for 100% S corp

5. # of SH=<100, family members may elect to be treated as one shareholder

6. Individual SH > US citizen, resident, resident-alien

 

Election to be an S corporation

- requires 100% consent from all SHs

- file election within 2 1/2 M from함effective date, 놓치면 내년에 해야함

1) An S corp with inception

    filed within 60days > that year

    filed after 60days > following year

2) S corp converted from a C corp,

    election filed by mar15 >that year

    election filed after mar 15 > following year

 

Termination of S corp

Revocation

- more than 50% SH consent to revocation

- Within 2 1/2: effective on the first day of the taxable year, if not next year

 

Termination

1. Corporation fails to satisfy requirements

  1) Corporate / partnership / foreign / more than 100 owners, terminate immediately

   2) Excess passive investment income(>25%), terminated at the beg of the fourth year

- if terminated, the tax year is divided into S and C year

   1) S short year: first day ~ 1 day before the termination date

   2) C short year: effective termination date 

- if terminated, income allocated daily basis bet S(F1120S) and C(F1120)

- once terminated Scorp can be reelected after 5 non-S corp years

 

Tax year

- Drop-down rule

* return is due by Mar 15th

 

Require tax year

1) Same tax year of more than 50% SH

2) Calender year

 

Optional tax year

3) Valid Biz purpose(natural Biz year)

    적어도 3년간 마지막 2달의 GR/12달 x 100 >=25%

 

4)up to 3 months deferred than the required year

 

 

SH's basis in S corporation stock

Initial or beginning basis in S corp stock

(+) Share of S corp ordinary income or loss

(+) Share of separately reported income or deduction

     (including tax-exempt income/ non-deductible expense)

 Basis before distribution

(-) Distribution (cash plus FMV of property)

 Ending SH's basis in S corporation stock 

 

S corporation income and deductions

- S corp ordinary biz income is not subject to SE tax,

   SH do not run the corp, while partners run the partnership

- distributed according to percentage of ownership,

   partnerships, and not S corporations, have profit distribution agreements

- Fringe benefit, Deductible

   all non-SH EE, ≤ 2% SH EE, >2% SH EE if included in W-2

1) Ordinary income and deductions    * ordinary income does not include distributions or long-term capital gains 2) Separately reported income and deductions(sch K) 10   1) Income, expenses, credits at the corporate level pass through to SH   2) Net income/ loss from rental activity   3) Interest, dividend, and royalty income   4) Capital gains/losses   5) Sec. 1231 gain or loss   6) Charitable contributions   7) Sec. 179 deductions for recovery property $1,050,000   8) Investment expenses including interest   9) Foreign income taxes paid  10) Non-taxable income/ Non-deductible expenses

 

 

F1120S >>>>>>>>>>> Sch K

Operating Exp	Separately reported
11. Rent expense 13. Int expense 15. Regular Depre	2&3. Rental inc/loss 12b. Investment int exp 11. sec 179 exp(depreciation) interest income charitable contribution

 

 

 

Allocation of S corporation income/loss to SH

S corp income&loss x #of days owned /365 x stock ownership

Corporate net business income: $36,500

  

 

S Corporation distributions, reduced in the following order

1) Accumulated Adjustments Account (AAA)

  - nontaxable distribution to the extent of AAA

  - cumulative undistributed net income of S corporation

  - cannot be negative as a result of the distribution, can be negative because of S corp's loss

2)  Earnings and Profits during C corporation

  - distribution over AAA> reduce E&P

  - Dividend income to shareholders

3) Other Adjustment Account(OAA)

  - distribution over AAA, E&P > OAA, nontaxable

  - tax-exempt income and non-deductible expenses

4) Capital gain

 

Beg Basis in S corp Stock

(+) Share of ordinary inc(loss) _ AAA

(+) Share of separately reported inc(loss) _ AAA

      Nontaxable inc(Nontaxable exp) _OAA

      Non deductible exp(penalty, entertainment exp, gift)  

Basis before Distribution > Nontaxable distributions within Basis

<Distribution_Cash, FMV of Property>

12/31 Ending Basis in Scorp stock

 

M-2 <1> AAA: taxable activity, personal use, penalty, entertainment exp, gift>25%

    + <2> CE&P

    + <3> OAA: Nontaxable activity, Life ins, State bond

 

 

Limitation on shareholder's deduction of S corporation losses

S corp loss   

1) reduce shareholder's stock basis

2) reduce shareholder's debt basis

* stock basis and debt basis are tracked separately, but together they form tax basis

- unused losses, carry forward deducted when stock and debt basis is increased

- Deduction is limited to the shareholder's at-risk basis

- Passive Activity loss limitations: SH not materially participate in S corp, loss is deductible to other passive activity

- Actively participated SH's(own at least 10% of int) S corp rental loss, deduct up to $25K 

 

 

Others

- An S corporation recognizes gain on the distribution of appreciated property

- No earnings and profits are generated by an S corp

- S corp converted from a C corp may be taxed on built-in gains, excess passive investment income, LIFO recapture

- Fringe benefits paid to more than 2% SH EE are deductible by an S corp, but included in the SH EE's compensation income

 

Built-in gains tax

- excess of the FMV of S corp's assets over the adjusted basis are disposed of by sale

- built-in losses reduce the built-in gains

- tax rate: 21%

- built-in gain paid by the corporation reduces the income passed through to the SH