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S Corporations: The Ins and Outs of Tax Reporting and Planning

Author/Moderator: Gregory B. McKeen, CPA
Publisher: AICPA
Availability: In Stock
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Description

Once again the darling form for many businesses. Find out why during this information-packed course. Practical, real-life examples give you ideas to apply immediately for your S Corporation clients. Review the advantages of the S Corporation tax rules. Minimize your client’s tax bill with the latest business and tax strategies that make S Corporations so popular. Comply with the unique tax reporting rules for completing Form 1120S. Decide if an S Corporation is your client's entity of choice.

Objectives: 
  • Comply with federal and state S Corporation laws and regulations
  • Apply special elections and tax treatments in S Corporations
  • Select tax planning ideas to utilize in S Corporations
  • Understand the complex rules of S Corporation distributions

Prerequisite:  None

Table of Contents

  • Chapter 1 - Why Subchapter S?
    • Learning Objectives
    • Introduction
    • Advantages of Corporations
      • Limited Liability
      • Continuity of Organization
      • Transfer of Interest
      • Ordinary Deduction for Stock Losses
    • Disadvantages of Corporations
      • Double Taxation
      • Cost of Organization
      • Rigidity of Operation
      • Liquidation
      • Payroll Taxes
    • Advantages of S Corporations
      • Escape Double Taxation
      • Passthrough of Losses and Credits
      • Self-employment Tax and Reasonable Compensation
      • Income Splitting
      • Liquidation
      • Personal Holding Company Income
      • Accumulated Earnings Tax
      • Cash Method
      • Alternative Minimum Tax
      • Tax Rates
    • Advantages of C Corporations
    • Limited Liability Company (LLC)
    • Summary
  • Chapter 2 - Qualifications
    • Learning Objectives
    • Introduction
    • Eligibility for S Corporation Status
    • Number of Shareholders
      • Treating Family Members as One Shareholder
      • Definition of Family Member
      • Partnership of S Corporations Can Avoid the 100-Shareholder Limitation
    • Eligible Shareholders
    • Estates
      • Estate of a Decedent
      • Bankruptcy Estate
    • Trusts as Shareholders
      • IRA's, SEPs, and Certain Charitable Trusts Generally Cannot Hold S Corporation Shares
      • IRA Can Hold S Stock of Certain Banks and Certain ESOP Rollovers
    • Charitable Organizations
    • A Single-Member LLC Can Be an Eligible Shareholder
    • Certain Corporations are Ineligible to Elect S Status
    • Certain Banks and LLCs Can Be Eligible Corporations
      • Banks
      • LLCs
      • Completing Form 2553 when an LLC Elects S Status
      • Relief from Late Filing of Form 8832 or Form 2553
    • One Class of Stock
      • Voting and Nonvoting Shares
      • Straight Debt
      • Governing Provisions
      • Buy-Sell Agreements
    • Qualified Subchapter S Trust
      • Beneficiary Includes S Corporation Passthrough Items on Form 1040
      • Income Distribution Requirement
      • Sale of S Corporation Stock by a QSST
      • QSST Election
    • Electing Small Business Trust
      • Potential Current Beneficiaries
      • Taxable Income
      • ESBT Election
      • Relief from Termination of the S Election When QSST or ESBT Election Is Not Timely Filed
    • S Corporation Can Hold Stock of Another Corporation
    • Qualified Subchapter S Subsidiary
      • Filing the QSub Election
      • Relief from Late or Invalid QSub Elections
      • QSub Election Form 8869
      • Termination of QSub Status
      • Electing QSub Status Is a Deemed Liquidation
      • Built-in Gains Tax and LIFO Recapture Tax
    • Summary
  • Chapter 3 - Election
    • Learning Objectives
    • Introduction
    • Time for Making the Election
      • Existing Corporations
      • Newly Formed Corporations
    • Shareholder's Consent
    • How to Make the Election
      • Filing the S Election
    • Invalid Elections
      • Extension of Time to File Consents
      • Relief When Consent of Community Property Spouse is Omitted
      • Filing the S Election Late under Rev. Proc. 2003-43
      • Relief for Late Election under Rev. Proc. 2007-62
      • Filing the S Election Late under Rev. Proc. 97-48
      • Obtaining a Letter Ruling
      • LLC Electing to be Treated as a Corporation
    • Electing S Corporation Status after Termination
    • C Corporation Carryovers
    • When First S Corporation Year Begins
      • New Corporation
      • Existing Corporation
      • C Corporation Can Change Its Fiscal Year Prior to Making the S Election
    • Summary
  • Chapter 4 - Termination
    • Learning Objectives
    • Introduction
    • Length of Election
    • Voluntary Termination (Revocation)
      • Revocation Effective Date
      • How a Revocation Is Filed
      • Rescission of Revocation
    • Involuntary Termination
      • Cessation of Small Business Corporation
      • Termination Effective Date
      • New Shareholders
    • Passive Investment Income
      • Corporations with Accumulated Earnings and Profits
      • Definition of Passive Investment Income
    • Notification of Termination
    • Allocation between Taxable Years
      • Methods of Allocation
      • Pro Rata Allocation
      • Election to Use Normal Tax Accounting Rules
      • Mandatory Use of Normal Tax Accounting Rules
      • Tax Planning Pointers
      • Computing Short Year's Tax
      • When Short-Year Passthrough Occurs
    • New Election
      • IRS May Allow New S Election before End of Five-year Period
      • New Election Normally Not Allowable if Termination was Voluntary
      • New Election within Five-year Period Requires Letter Ruling
      • New Election Allowable if S Election Never Became Effective
    • Termination Waiver
      • IRS Rulings on Termination Waivers
      • User Fee
    • Post-Termination Transition Period
  • Chapter 5 - Taxation of S Corporations
    • Learning Objectives
    • Introduction
    • Tax on Built-in Gains
      • Recognition Period
      • Corporations Subject to the Built-in Gain Rules
      • Recognized Built-in Gain
      • Built-in Losses
      • Cumulative Recognized Built-in Gain Is Limited to Net Unrealized Built-in Gain
      • Tax Trap - Inventory and Accounts Receivable Can Cause Built-in Gains
      • Computation of Built-in Gains Tax
      • Summary of Limitation on Built-in Gains
      • Carryover of Built-in Gains
      • Corporation Must Identify Built-in Gains and Losses
      • Passthrough of Built-in Gains Tax
      • Built-in Gains Tax Rate - Capital Gain
      • Corporate Carryovers Offset Built-in Gains
      • Gains Will Be Presumed to Be Built-in
      • Exchanged Basis Property
      • Transferred Basis Property
      • Installment Sales
      • Planning for Built-in Gains and Losses
    • Tax on Excess Net Passive Income
      • Definitions
      • Gross Receipts
      • Calculating the Tax on Excess Net Passive Income
      • Credits
      • Gains Subject to Tax on Passive Income and Built-in Gains Tax
      • Waiver of Tax on Passive Income
      • Passthrough Reduced by Tax on Excess Net Passive Investment Income
    • Business Credit Recapture
      • Effect on Passthrough
    • Estimated Tax Payments
    • Summary
  • Chapter 6 - Passthrough to Shareholders
    • Learning Objectives
    • Introduction
    • Schedule K-1
    • Passthrough Items
      • Nonseparately Stated Income or Loss
      • Separately Stated Items
      • Nonpassive or Passive Nature of Passthrough
    • How Shareholders Treat Passthrough Items
      • Allocation of Items
      • When Reported
      • Losses
      • Ownership on Stock Transfer Date
    • How Allocation of Passthrough Is Accomplished
      • Passthrough When Stock Ownership Remains Unchanged
      • Passthrough If Stock Ownership Changes
      • Death of Shareholder
      • Election to Treat Tax Year as if It Consisted of Two Tax Years upon Termination of Shareholder's Entire Interest
      • Election When a Qualifying Disposition Takes Place
      • Credits
    • Passthrough of Corporate Tax
      • Built-in Gains
      • Passive Investment Income
      • LIFO Recapture
      • Business Credit Recapture
    • Reasonable Compensation
      • Payroll Taxes
      • Excessive Compensation
      • Criteria for Reasonable Compensation
    • Cancellation of Indebtedness Income
    • Summary
  • Chapter 7 - Basis and Losses
    • Learning Objectives
    • Introduction
    • Basis of Stock
      • Basis Cannot Be below Zero
      • Changes to Asset Basis Due to Business Credit and Recapture Can Affect Stock Basis
      • Income in Respect of a Decedent and Basis of Inherited Stock
      • Basis of Stock Received by Gift
      • Charitable Contributions of Appreciated Property
      • Items Must Be Reported
      • Basis Is Reduced by Nondeductible Losses
      • When Basis Is Adjusted
      • Carryover of Losses
    • Basis in Debt
      • Basis Reduction Applies to Debt Outstanding at Year-end
      • Restoration of Basis in Debt
      • Separate Corporate Debts
      • What Constitutes Basis in Debt
      • Debt Must Be to Shareholder
      • Guaranteed Loans
      • Substituting Shareholder's Note
      • Debt Basis Arises only if Shareholder Experiences Economic Outlay
      • Pledging Stock as Collateral
      • Loan from Related Entity Generally Does Not Result in Debt Basis
    • Collections on Shareholder Loans
    • Stock Dispositions
      • Reduction of Basis of Individual Shares
    • Identity of Passthrough Losses
      • Losses That Exceed Basis
      • Order of Adjustments to Basis
    • Carryover after Termination of Election - The Post-Termination Transition Period
      • Basis Increases during the Post-Termination Transition Period
      • Definition of Post-Termination Transition Period
    • Worthless Stock
    • Section 1244 Stock
    • Shareholder and Corporate Documentation
  • Chapter 8 - Distributions
    • Learning Objectives
    • Introduction
    • Definition of Distribution
    • Self-Employment Tax
    • Reporting Distributions to Shareholders
      • Nondividend Distributions
      • Dividend Distributions
      • Property Distributions
    • Relationship of Passthrough, Basis, and Distribution
    • Application of Distributions
      • Distributions If No A&P
      • AE&P
      • Distributions If There Is AE&P
      • Summary of Distribution Layers
    • Accumulated Adjustments Account (AAA)
      • Annual Adjustments to AAA
    • Order of Applying Distributions - If A&P
      • Calculation of AAA, AE&P, and Basis Illustrated
      • Stock Basis or AAA Balance at Beginning of Year Can Be Distributed Free of Tax
      • Distributions When AAA Is Less than Zero
      • AAA - New Shareholder
    • Distributions of Previously Taxed Income (PTI)
    • Property Distributions
      • Gain or Loss on Property Distributions
    • Dividend Tax Rates
    • Distributing A&P to Eliminate Dividend Distributions and Avoid Passive Investment Income Problems
      • A&P Can Be Distributed before AAA
      • Election to Make a Deemed Dividend
    • Tax-Exempt Income
      • Other Adjustments Account
    • Tracking AAA, OAA, and PTI on Form 1120S
    • AAA - Stock Redemption
    • Reasonable Compensation
    • Post-Termination Transition Period
    • Summary
  • Chapter 9 - Taxable Year of Corporation
    • Learning Objectives
    • Introduction
    • Taxable Year Choices
    • Permitted Year
    • Business Purpose Fiscal Years
      • Business Year
      • Automatically Approved Years
      • Natural Business Year - The 25% Test
      • Business Purpose
      • User Fee
    • Applying for a Fiscal Year
      • How a New S Corporation Applies for a Fiscal Year
      • Existing S Corporations
    • The Sec. 444 Election
      • Length of Election
      • How Section 444 Election Is Made
      • Grandfather Rules
      • Restrictions on Section 444 Fiscal Years
      • Tiered Structures
    • Required Payments
      • Fiscal Year S Corporation Can Be Liable for Required Payments
      • Required Payments Are Deposits
      • Interest and Penalties
      • Definitions
      • Calculation of Required Payment
      • Refund of Required Payments
      • Illustration of Required Payments
    • Summary
  • Chapter 10 - Passive Activity Rules, LIFO Recapture, Fringe Benefits, and Other Considerations
    • Learning Objectives
    • Introduction
    • Passive Activity Loss Rules
      • Summary of Passive Activity Loss Rules
      • Definition of Activity
      • Combining or Separating Activities
      • Pros and Cons of Combining or Separating Activities
      • How S Corporations and Shareholders Group or Separate Activities
      • Making the Election to Combine or Separate Activities
      • Combining Rental Activity with Trade or Business Activity
      • Material Participation
      • Nonpassive or Passive Nature of Passthrough Items
      • Rental Activities
      • Sale of Corporate Assets
      • Nonpassive or Passive Nature of Income from Distributions
      • Nonpassive or Passive Nature of Income from Sale of Stock
      • Self-Rented Property
      • Self-Charged Interest
      • Disposition of an Activity
      • Carryover of C Corporation Passive Activity Losses into an S Year
      • Modification of the Passive Activity Loss Rules for Real Estate Professionals
    • Investment Interest Limitation
      • Investment Interest Expense
    • Interest to Finance S Corporation Stock
    • LIFO Recapture
      • Basis Increased
      • Tax on LIFO Recapture Is Payable in Installments
      • How Tax Is Paid
      • Effect on Basis, AAA, and A&P
      • Reporting LIFO Recapture to Shareholders
      • LIFO Recapture Applies Only When Inventory Is Acquired from a C Corporation
      • Partnership Interests Held by a C Corporation Can Cause LIFO Recapture
    • Fringe Benefits
      • Shareholder-Employees Treated as Partners
      • Fringe Benefits are Wages
      • Health and Accident Insurance Premiums
      • Medical Savings Accounts (MSAs) and Health Savings Accounts (HSAs)
      • Above-the-Line-Deduction for Medical Insurance
    • Shareholder Expenses
      • Expenses Paid by Accrual Basis Corporation
      • Unreimbursed Shareholder Expenses
    • Domestic Production Activities Deduction
      • The Section 199 Domestic Production Activities Deduction
      • Deduction Applied at Shareholder Level
      • Calculation of the Section 199 Deduction
      • Allocation of Costs May be Required
      • Reporting Information to Shareholders
      • Deduction Does Not Affect Stock Basis
      • Basis and Other Limitations can Restrict the Deduction
      • AMT and Self-employment Tax
      • Shareholder uses Form 8903 to Calculate Deduction
    • Section 179 Deduction
      • Dollar Limit
      • Property Limit
      • Taxable Income Limit
      • Higher or Lower Limits May Apply
      • Schedule K-1 Reporting
      • Effect on Basis
    • Other Considerations
      • Collectible Gain
      • At-Risk Rules
      • Carryovers between S and C Years
      • Sec. 291 Rules Relating to Corporate Preference Items
      • Pension and Profit-Sharing Plans
      • Loans from Qualified Retirement Plans
      • Oil and Gas
      • Consistency of Shareholder's Return
      • Statute of Limitations
      • Penalty for Failure to File S Corporation Return
      • Small S Corporations Can Skip Portions of Form 1120S
      • Schedule M-3
      • S Corporations with Foreign Bank Accounts or Foreign Operations
      • Form 1120S and Schedule K-1
    • Summary
  • Chapter 11 - Ethics Focus: Taxation
    • Ethics Overview
    • Recent Developments
    • Spotlight on Independence in Tax Services
    • Key Ethical Dilemmas and Judgment Calls
    • Addressing Ethical Dilemmas
    • Available Resources
  • Chapter 12 - Latest Developments

736155

Excerpts

Chapter 1

Why Subchapter S?

Learning Objectives

Upon completion of this chapter, you will be able to

  • Recognize the advantages of S corporations.

Introduction

In this chapter, we will discuss the following:

  • Limited liability
  • Advantages of S corporations over C corporations
  • Advantages of C corporations over S corporations

Deciding whether to incorporate, and then whether to operate as an S or a C (regular) corporation, or partnership, is not easy. In this course, we will examine some of the advantages and disadvantages of incorporation and then go through the requirements for electing to be an S corporation, as well as the rules for operating an S corporation.

During the course, we will address practical situations that occur in the operations of S corporations and will examine some tax return issues. A copy of the S corporation tax return, Form 1120S, and Schedule K-1 can be found at the end of Chapter 10.

Our discussion starts with a question - why should your client consider being an S corporation, or even a C corporation, at all? Why not operate as a proprietorship, if there is one owner, or as a partnership, if there is more than one owner?

Advantages of Corporations

  • Limited liability

    Most corporations are formed because the corporate entity offers some protection against personal liability. Unlike a general partner or proprietor, shareholders are generally liable for loss only to the extent of their investment. As a practical matter, however, before making a loan, a lending institution will usually insist that individual shareholders in a closely held corporation agree in writing to be personally liable for the debt. Although a professional person normally cannot protect himself from liability arising from personal negligence, he/she may be able to protect him/herself from lawsuits arising from the negligence of other professionals in the corporation.

    This non-tax factor - the liability shield - can be very important, and, indeed, in many cases, may be the sole reason for incorporating.

    Continuity of Organization

    A corporation's existence depends on its charter and its outstanding stock, rather than circumstances relating to the owners of the stock. Therefore, the death, insanity, bankruptcy, retirement, resignation or expulsion of any shareholder will not, in itself, cause dissolution of the corporation.

    Transfer of Interest

    Shares of stock in a corporation can be transferred with relative ease. This provides gift and estate planning opportunities that are not so readily achievable in other forms of doing business. It also makes it easier to give a "piece of the action" to key employees or relatives who are moving into the business. If real estate is held outside of the corporation, or in a separate corporation, shareholders can sell or transfer stock in the business, while still retaining their ownership of the real estate.

    Ordinary Deduction for Stock Losses

    Under Sec. 1244, a loss realized because of the sale or worthlessness of C or S corporation stock may qualify as an ordinary loss, rather than a capital loss. A loss arising from disposition of a partnership interest is generally a capital loss.

  • Disadvantages of Corporations

    Double Taxation

    Both regular corporations and, to a much lesser extent, S corporations pay tax at the corporate level. There can also be tax at the shareholder level when the income is distributed or passed through. There is never a tax at the partnership level.

    Cost of Organization

    Generally, the cost of incorporating is more than the cost of forming a partnership. Certain formalities and technicalities such as state filings, writing up bylaws, issuing stock, changing title to assets, and holding organizational meetings are all required. And attorneys' fees are also a normal expense of incorporating.

    Rigidity of Operation

    A partnership has more flexibility in its operation than a corporation. A partnership can make special allocations of certain income and expense items, if there is substantial economic effect for the allocations. Corporations must keep minutes of formal meetings, deal with complex payroll records, and file additional tax returns. Furthermore, S corporation items of income, loss, deduction, and credit must be allocated to shareholders based on the number of shares held by each shareholder.

    Liquidation

    The complexity of liquidation is another disadvantage of the corporate form. Liquidation must be formal, and many potential tax traps exist. Both the corporation and the shareholders may incur tax when the corporation liquidates.

    Videocourse Details

    NASBA Field of Study: Taxes
    Level: Intermediate
    Recommended CPE Credit: 14
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