S Corporations A Complete Guide

Transcription

1 S Corporations A Complete Guide Edward K Zollars Phoenix, Arizona S Corporations A Complete Guide PARTNERSHIPS VS S CORPORATIONS 1

2 Comparison Background Formation of the Entity Basis Rules Ownership Taxable Year Entity Taxation Allocations Comparison Miscellaneous Current Distributions Sales to Outsiders Liquidations and Redemptions Terminations & Revocations Death of Owner 2

3 Comparison Applicability of Subchapter C Social Security, Fringe Benefits and Compensation Family Owners S Corporations A Complete Guide CORPORATIONS ELIGIBLE TO ELECT S 3

4 Eligibility Small Business Corporations Number of Shareholders Eligible Estates and Trusts Special S Trusts Qualified Subchapter S Trust Electing Small Business Trust 4

5 QSST Requirements for a QSST When a QSST Makes Sense Election ESBT Definition Number of Deemed Shareholders Special Rule Regarding Dispositions Taxation of ESBTs 1411 Net Investment Income Tax Ineligible Trusts Election Powers Allowed 5

6 Conversions Convert QSST to ESBT Convert ESBT to QSST Tax Exempt Organizations UBIT Basis Reduction ESOP Prohibited Transaction Exemption UBIT Exemption 6

7 S Corporation Subsidiaries Affiliated Group Qualified S Corporation Subsidiaries One Class of Stock Legal Rights S Corporation Single Class of Stock Outstanding Stock Treatment of Restricted Stock Treatment of Deferred Compensation Identical Rights to Liquidation and Proceeds Call Options Debt Obligations 7

8 Straight Debt Safe Harbor Straight Debt Defined Subordination Modification or Transfer Treatment of Straight Debt for Other Purposes Treatment Upon Conversion to S Status S Corporations A Complete Guide MAKING THE S ELECTION 8

9 When is the Election Made Existing Corporation Newly Formed Corporation Due Date Extensions How is the Election Made Who Must Consent 9

10 Shareholder s Consent Husband and Wife Community Property Minors Estate Receivers and Bankruptcy Trustees Power of Attorney Qualified Trusts Cost Invalid Elections Repairing Invalid Elections 10

11 Permitted Year Ends Business Purpose Year Ends Ownership Year Ends 444 Elections Mechanics Definitions Filing Form 8752 C Corporation Carryovers General Rule Net Operating Losses Suspended Passive Losses 11

12 S Corporations A Complete Guide BUILT IN GAINS TAX IRC 1374 Definitions and Principles Implication of Deductions Options to Acquire Property Net Built in Gain Computing Net Recognized Built in Gain 12

13 Limitations on Built In Gain Recognition Net Income Limitation Presumption Sales are Built in Gain Bulk Sale Rule for Inventory LIFO Recapture Taxation of Built in Gain Implication of C Corporation Carryforwards Comprehensive Example of Multiple Year Built in Gains Application to Installment Sales 13

14 Other Factors Impact of tax on shareholders Impact of tax on AAA S Corporations A Complete Guide SHAREHOLDER BASIS 14

15 Calculation of Basis Original Basis in Stock Annual Adjustments to Basis Ordering of Basis Adjustments Basis in Stock Shareholder Reporting Requirement for Basis Adjustment Issues Arising from Inherited Stock Separate Share Rule Duty of Consistency 15

16 Basis in Debt Restoration of Basis in Debt Kinds of Debt that Provide Basis Repayment of Debt Open Account Debt Reporting on K-1 Conversion of Debt to Stock Timing of Basis Adjustments Ordering Rule for Basis Adjustments Election to Reorder Basis Adjustments Required Attachments to Tax Return 16

17 Other Issues Disposals of Stock Carryover of Losses S Corporations A Complete Guide DISTRIBUTIONS AND AAA 17

18 What is AAA? Uses of AAA and its Impact on Distributions Corporate Level Account Computation of AAA Federal Taxes Impact of AAA Impact of Specific Types of Income and Deductions What is AAA? Distributions and AAA Effect of Stock Redemptions Property Distributions Previously Taxed Income (AAA s Ancestor) 18

19 Features of AAA Negative AAA Pro-rata distribution rule AAA upon termination of status Accumulated Earnings & Profits Calculation on Conversion Generally Frozen Upon Conversion 19

20 Nonliquidating Distributions Property Distributions Application of Distributions No E&P E&P Exists Alternative Distribution Elections Optional Elections Bypass the AAA Account Make a Deemed Dividend from E&P Bypass PTI Election Requirements Why Make the Election? 20

21 Distributions Following Termination Transition Periods Post Termination Transition Period Other Adjustments Account Collects Other Items Primarily Keeps Accountants (Somewhat) Happy 21

22 Previously Taxed Income Effect on Ordering of Distributions How PTI Differs from AAA Retained Earnings & Book/Tax ASC 750 requires consideration of potential built in gains tax GAAP Issue exposure to claim of lacking S status 22

23 S Corporations A Complete Guide REASONABLE COMPENSATION AND OTHER TAX RULES Compensation & Fringe Benefits Employment Taxes Reasonable Compensation Medicare Taxes & S Corporation Fringe Benefits Health Insurance HSA & S Corporations 23

24 Passive Activity Loss Taxpayer s Choice of Grouping Testing for Reasonable Grouping Activities in the S Corporation Limitations on Grouping Common Ownership Exception Other Issues Alternative Minimum Tax Considerations Other Separate Identification Issues 24

25 Special Reporting of Interest Interest on Debt Proceeds Allocable to Passthrough Debt Used to Purchase S Corporation Stock Avoided Cost Rules General Description Definitions Applying the Rule Mechanics Flow Through Entities De Minimis Flow Through Rules 25

26 1411 Tax and Dispositions Basic Treatment and Provisions Passthrough Entity 1411(c)(4) Disposition 1411 Holding Period 1411 Property Subsidiary Passthrough Entity 1411 Tax and Dispositions General Rule for Passthrough Interest Dispositions Gain on Disposition of Interest Loss on Disposition of Interest 26

27 1411 Tax and Dispositions Optional Simplified Reporting Eligible Transfers Calculations Under the Simplified Method 1411 Tax and Dispositions Rules to Deal with Installment Sales Tiered Entities Information Reporting Issues 27

28 1411 Tax and Dispositions Dispositions Resulting in Termination of S Status Built in Gain Tax Assets Qualified Subchapter S Trusts 1411 Tax and Dispositions Liquidation Following Sale of All Assets Excluded Gain or Loss 28

29 S Corporations A Complete Guide TERMINATION AND REVOCATION Revocation Revocation for the Entire Year Prospective Revocation How to Revoke Rescission of Revocation 29

30 Termination Termination Risks Treatment of S Corporation Termination Year Prorata Allocation Election to Use Cut-Off Accounting First C Corporation Year Annualization of Tax Other Special Rules Treatment of Items Upon Termination 30

31 Termination Due to Excess Passive Income Triggering Level IRS Waiver of Tax (Only) Calculation of Net Passive Income Definition of Terms Gross Receipts Excluded from Gross Receipts Passive Investment Income Rents Termination Due to Excess Passive Income Calculation of Excess Net Passive Income Coordination with Built-in Gains Tax 31

32 Re-Election After Termination Grant of Authority to IRS Consent of Commissioner Greater Than 50% Ownership Change Less Than 50% Ownership Change S Corporations A Complete Guide REPORTING TO SHAREHOLDERS 32

33 Taxable Income Unpaid Business Income and Expense Nondeductible Corporate Items Passthrough Items Separately Stated Items Non-separately Computed Income or Loss 33

34 Items Reported Trade or Business Income Separate Activity Reporting Rental Real Estate Activities Rentals Other Than Real Estate Interest Income Dividend Income Ordinary Dividends Qualified Dividends Items Reported Royalties Net short term capital gain or loss Net long term capital gain or loss Collectibles gain or loss Unrecaptured 1250 Gain Net 1231 Gain (Loss) Other Income 34

35 Items Reported Royalties Net short term capital gain or loss Net long term capital gain or loss Collectibles gain or loss Unrecaptured 1250 Gain Net 1231 Gain (Loss) Other Income Items Reported 179 Deduction Line 12 a d (Various Deductions) Line 13 Credits (and recaptures) Foreign Transactions AMT Items Items Affecting Shareholder Basis Other Information Income/loss recognition 35

36 S Corporations A Complete Guide RESOURCES IN MANUAL 36