Table of Contents

Chapter 1 - S Corporations - Section 1. 1

Introduction. 1

Advantages. 1

Planning. 2

Disadvantages. 5

Passthrough Entities - 20% Deduction. 5

Becoming an S Corporation. 6

S Corporation Status. 8

Number of Shareholders. 8

Individuals Only. 8

Estates. 8

Grantor Trusts. 8

Voting Trusts. 8

Testamentary Trust 9

Qualifying Simple Trusts. 9

Electing Small Business Trusts. 9

Aliens. 10

C Corporations. 10

Tax-Exempt Entities. 10

Exception for S Corporation ESOP - '512. 10

One Class of Stock. 10

Affiliated Groups & Subsidiaries. 13

Prior Law.. 13

Current Law.. 13

Domestic Corporation. 14

Election Requirement 16

Making the Election. 16

Form 2553. 16

Invalid S Elections. 17

Extension. 17

Chapter 1 - Section 1 Review Questions. 19

Chapter 1 - S Corporations - Section 2. 20

S Corporation Termination. 20

Revoking the Election. 22

Procedure. 22

Effective Date. 22

Ceasing to Qualify. 22

Effective Date. 23

Passive Income - '1362. 23

Effective Date. 23

S Termination Year 23

Pro Rata Allocation. 24

Allocation Based On Normal Accounting Rules. 24

Annualization of 1120 Short Year 25

Taxation of S Corporations. 25

S Corporation Income & Expense. 25

Separately Stated Items. 26

Nonseparately Stated Items. 27

Interest Expense on Debt-Financed Distributions. 27

Tax Exempt Income. 27

Net Operation Losses. 28

Carryover of C Corporation NOLs. 28

Reduction of Pass-Thru Items. 28

Built-In Gain - '1374. 29

Net Recognized Built-In Gain. 30

Recognized Built-In Gains. 30

Recognized Built-In Loss. 31

Deduction Items. 31

Amount of Tax. 31

Credits. 31

Net Operating Loss Carryovers. 32

Treatment of Certain Property. 32

Transfer of Assets. 32

Passive Income - '1375. 32

Gross Receipts. 32

Sales or Exchanges of Stock or Securities. 33

Passive Investment Income. 33

Royalties. 34

Rents. 34

Interest 34

Figuring the Tax on Excess Net Passive Income. 34

Net Passive Income. 35

Excess Net Passive Income. 35

Special Provisions. 35

Waiver of Tax. 36

Tax Preference Items. 36

Chapter 1 - Section 2 Review Questions. 37

Chapter 1 - S Corporations - Section 3. 39

LIFO Recapture Tax. 39

Capital Gains Tax. 39

Reducing Corporate Capital Gains. 39

Figuring Corporate Taxable Income. 39

Recapture of Investment Credit 40

Estimated Corporate Tax Payments. 40

Basis of Stock & Debts. 40

Adjustments to Basis. 40

Limitation on Loss Deductions. 40

Basis Limit 41

Adjustments to Stock Basis. 41

Increases. 41

Decreases. 41

Adjustments to Debt Basis. 42

Restoring Basis of Loans. 42

Loan Repayments. 42

Guarantees. 43

At-Risk Rules - '465. 43

Reasonable Compensation. 45

Related Party Rules. 45

Definition of Related Party. 45

Stock Attribution Rules. 45

Business Expenses & Interest 46

Distributions. 46

Earnings & Profits. 46

Accumulated Adjustments Account (AAA) 47

Dividend Election. 47

Post-Termination Distributions. 48

Transition Period. 48

Order of Distribution. 48

No Earnings & Profits. 49

Appreciated Property Distributions. 50

Taxable Year 52

Business Purpose. 52

Change of Tax Year 52

Form 1120S. 53

Extension. 53

Late Filing. 53

Reasonable Cause. 53

Schedule K-1. 54

Shareholders Treatment Of S Corporation Items. 54

Pro Rata Share. 54

Optional 10-year Write-Off of Tax Preferences. 55

Fringe Benefits. 55

Health Insurance Premiums. 56

Reporting Requirements. 56

Medical Deduction. 56

Chapter 1 - Section 3 Review Questions. 58

Answers & Explanations. 60

Chapter 1 - Section 1 Review Questions Feedback. 60

Chapter 1 - Section 2 Review Questions Feedback. 63

Chapter 1 - Section 3 Review Questions Feedback. 67

Glossary. 71

Keywords & Phrases. a

CPE Exam Answer Sheet d

Final Examination. e