Chapter 11

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School

Bowling Green State University *

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3210

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Accounting

Date

Apr 3, 2024

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docx

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Uploaded by BaronScorpionPerson3756 on coursehero.com

Chapter 11 Tuesday, February 27, 2024 1:09 PM S corporation is NOT a legal entity under the IRS  S Corporation - Overview o Advantages vs Disadvantages of S Corporation  A: Income being taxed at the owner level, shareholders of an S corporation can take advantage of the losses from the S corporation, distributed income out of the S corporation is not taxed, separately stated items retain their character as they flow through to shareholders, income out of the S corporation is not assessed self-employment taxes  D: distributions are not taxed but all income out of the S Corp is taxed as it is earned just not when it is distributed, to some extent S corp is limited in the capital structure that they can have, it is a corporation but taxed differently than a regular corporation (resembled partnership), to be taxed as an S Corp all shareholders have to elect this status o Tax liability may arise at the entity level but it's not income tax ( if it operated as a s corp then wants to be taxed as an S corp) o Entity is subject to Subchapter C rules for a transaction unless Subchapter S provides alternate rules  Knowledge Check #1 Which of the following statements is true regarding S corporations? a. Corporations taxed as S corporations offer the same legal protection to owners as corporations taxed as C corporations. b. S corporations are subject to the corporate federal income tax. c. Allocations of income from an S corporation are subject to self- employment taxes. d. S corporations’ income is taxed at both the shareholder and corporate level.  S-Corporation - Election o Formation 351 o Qualification requirements:  Domestic corporation  Must not otherwise be "ineligible" (ex. Banks/insurance companies)  Only one class of stock (could have one stock with voting rights and one without voting rights but cannot have any differences in distribution and liquidation rights)  100 shareholders or less  May include resident individuals, estates, certain trusts, and certain tax- exempt organizations  Cannot be another S corp, C corp, or partnership  Any family members that are shareholders within the same S corporation is counted as only ONE shareholder

 Family is defined as people with one common ancestor, goes back 6 generations. Linear descendants and their spouses (Pappi Joes great aunt Mary whose married to the grandfather of Grandons grandsons dogs neighbors mailman)  Cannot include any nonresident alien (state specific, 9 states do community property states treats spouses as having owning half property)  Filing the election  Form 2553  Effective date  Ex) 2024  Then you could elect it in 2023 or by March 15, 2024.  If you elect it AFTER March 15 2024, then the S Corp election will be for 2025  Knowledge Check #2 Suppose CCS was formed with Maria Johnson, Stephanie Walker, and Chase Inc., a corporation owned by Chance Armstrong, as shareholders. Would CCS be eligible to elect S corporation status? o No, cannot have a C Corp as a shareholder of an S corporation  Knowledge Check #3 Suppose Maria, Stephanie, and Chance recruited 97 U.S. residents to become shareholders of CCS. Meanwhile, Maria gave several of her CCS shares to her grandfather and his bride as a wedding gift and to her first cousin as an MBA graduation gift. After the transfer, CCS had 103 shareholders. Can CCS elect S corporation status? Y es, because all family members are treated as one (all four are one)  Knowledge Check #4 Which of the following statements is true under S corporation status? a. Voting common stock and voting preferred stock are treated as a single class of stock for an S corporation. b. A group of family members is treated as different individual shareholders in an S corporation. c. A partnership can own S corporation stock. d. Shareholders with NRA spouses in community property states cannot own S corporation stock. e. S corporation status is permitted for non-U.S. corporations.  S Corporation Terminations o S Election can be terminated  Voluntary Terminations  Elected by shareholders > 50% of stock  Effective Date  By March 15th

 Involuntary Terminations  Most common type  Several ways this can happen  When entity does not meet requirements of the above (ex. Introduce another class of stock, over 100 shareholders)  If S corp operating previously as a C Corp and has excessive passive income over three years  Effective date  By March 15th  Short tax Years  Tax year less than 12 months  Allocation of income across S Corp and C Corp  "Daily Method" or "Specific identification method"  S Corporation Reelections  Available after 5 years from termination  S Corporation Operations o Filing requirements  Form 1120-S due by March 15th after the S corporation's year-end  Automatic 6 month extension by filing form 7004  Estimated payments  Generally, follow C corporation rules o Accounting methods and periods  Elected at entity level  Methods: not as restricted  Accounting period: must us calendar year o Income and loss allocations  Based on stock % owned  Allocations are at year-end  Pro rata, per day basis  Total income/ total # days 365  Exception: use normal accounting rules to allocate  Knowledge Check #5 CS was formed as a calendar-year S corporation. Maria, Stephanie, and Chance are equal (one-third) shareholders. On June 14, 2023, Chance sold his CCS shares to Maria. CCS reported business income for 2023 as follows: January 1 through June 14 (165 days) $100,000 June 14 through December 31 (200 days) 265,000 January 1 through December 31, 2021 (365 days) $365,000 Question 1 - How much 2023 income is allocated to each shareholder if CCS uses the daily method of allocating income? o Daily Method  365,000/365=1,000/day  All) 1000* 165=165000 * 1/3=55,000  Maria) 1000*200=200000 * 2/3=133,333.333  Steph) 1000*200=200000 *1/3= 66,666.67

 Marias ownership increases to 2/3 since chance sold her his part. Stephanie's does not change Period Chance Steph Maria A (Jan-June 14) 55,000 55,000 55,000 B (June 14-Dec 31) 0 66,666.67 133,333.3 o Specific Identification Method  100,000/3=33,333.3333  265,000/3=88,333.3333 (Steph)  265,000* (2/3) = 176,666.6667 Maria Period Chance Steph Maria A 33,333.3333 33,333.33 33,333.33 B 0 88,333.33 176,666.667  S Corporation Operations o S corporation income  2-step approach  Ordinary Business income (loss)- page 1 of 1120s  Separately stated items- Schedule K of Form 1120S  Similar to partnership separately stated items  Items that apply to C Corporations but not S Corporations  Knowledge Check #7 Deer Corporation, an S corporation, is owned by Jane and Rebecca. Jane owns 60% of the stock and Rebecca owns 40% of the stock. At the beginning of the year, Jane’s basis in her Deer stock was $40,000. Deer reported the following information for the current year. Sales revenue $750,000 Cost of goods sold $200,000 Long-term capital gain $4,000 Dividend income $6,000 Tax-exempt interest income $3,000 Salary to owners $120,000 Charitable contribution $5,000 Employee wages $50,000 Depreciation expense $12,000 Miscellaneous expense $10,000 Distribution to Jane $60,000 Distribution to Rebecca $40,000 Question 1 – What amount of ordinary business income is allocated to Jane? Question 2 – What is the amount and character of separately stated items allocated to Jane o Q1

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