R-3

S- CORP:

-The taxability of distributions to shareholders in S corporations with no C corporation

earnings and profits is as follows:
1.
To the extent of basis in stock - tax free; treated as return of capital.
2.
Any distributions in excess of the shareholder's basis - taxable; treated as
capital gain.
-Rule: Fringe benefits paid by an S corporation are deductible by the S corporation only
for non-shareholder employees and those employee-shareholders owning 2% or less of
the S corporation. Other fringe benefits paid are deductible by the S corporation if
included as part of gross income from the S corporation for the individual receiving the
benefits (i.e., included as part of income on the shareholder's W-2).
-Rule: Both tax-exempt and taxable interest income increase a shareholder's basis in S
corporation stock.
S

corporations that are former C corporations with undistributed C corporation earnings

and profits are restricted in the amount of passive investment income they can realize
without terminating their S election. The restriction is 25% of total gross receipts from
passive investment income. The S election is terminated if the S corporation has
passive investment income greater than 25% of gross receipts for three consecutive
years.
S corporation status can be revoked if shareholders owning more than 50% of the total
number of issued and outstanding shares consent. The specific percentage of voting
and nonvoting shareholders is not considered, just the total. Holders of more than
25,000 total shares must approve the revocation.

C corporations may adopt any year-end, provided the year end is approved by the
IRS.
-

An S corporation is subject to the "built-in gains" tax (as well as the "LIFO Recapture"
tax and the "Passive Investment Income" tax) only if the S corporation had previously
been a C corporation. In this question, the corporation elected "S" status on the day or
incorporation; hence, the corporation was never a C corporation. So, the "built-in gains"
tax doesn't apply to the facts presented.
-

The owner's basis in an S Corporation is increased by the owner's share of profits and
decreased by the owner's share of losses. It is not affected by any bank loans increased
or decreased by the corporation. It is only increased by direct loans made to the
corporation by the owner.
-

Rule:

The charitable deduction of a corporation is limited to 10% of its taxable income

computed without regard to:
1. The contribution deduction

2. The dividends received deduction

3. Net operating loss carryback
4. Capital loss carryback
-Rule:

Personal holding company status applies if a corporation is owned more than

50% by five or fewer individuals at any time during the last half of the tax year and if at
least 60% of adjusted ordinary gross income for the tax year is personal holding
company income (which would include income from investments in stocks and
securities).
Rule:

A corporation is a personal holding company if 60% of adjusted ordinary gross

income consists of:
1. Dividends.
2. Taxable interest.
3. Royalties, but not mineral, oil, gas or copyright royalties.
4. Net rent, if less than 50% of ordinary gross income.
Rule:

1. A corporation that has always been an S corporation may have both "passive
income" and "non passive income."
2. Shareholders of an S corporation must be: individuals, estates, a voting trust, a
grantor trust, and/or a bankruptcy estate.
C Corp
-Losses

resulting from the sale, exchange or worthlessness of Section 1244 qualifying

stock (also called small business stock) are treated as ordinary losses up to $50,000 in
any tax year. However, this loss is available only to original owners of the stock.
A personal holding company deducts federal income taxes in computing undistributed
personal holding company income. A personal holding company deducts net long-term
capital gain less related federal income taxes in computing undistributed personal
holding company income.
Under the accrual basis of accounting, when you include an amount in gross income on
the basis of a reasonable estimate, and you later determine the exact amount, the
difference (if any) is taken into account in the tax year in which the determination is
made.
A corporation is a personal holding company (PHC) if (1) at any time during the last half
of the taxable year more than 50% of the value of the outstanding stock is owned by 5
or fewer individuals, and (2) at least 60% of its adjusted ordinary gross income for the
year is investment-type income.
While the cash basis of accounting is used by most taxpayers for tax purposes, the
accrual basis method of accounting for tax purposes is required for the following:
1. The accounting for purchases and sales of inventory,

2. Tax shelters,
3. Certain farming corporations, and
4. C corporations, trusts with unrelated trade or business income, and partnerships
having a C corporation as a partner provided the business has greater than $5
million average annual gross receipts for the three-year period ending with the tax
year.