Question & Answer

Under what circumstances could a corporation with earnings and profits make a nontaxable distribution to its shareholders after the S election termination?

If an S corporation with accumulated E&P makes a distribution, from what accounts (and in what order) is the distribution deemed to be paid?

What does the accumulated adjustments account represent? How is it adjusted year by year? Can it have a negative balance?  

What role does debt basis play in determining the taxability of operating distributions to S corporation shareholders?

How are the tax consequences of a cash distribution different from those of a noncash property distribution to both the S corporation and the shareholders?

If a corporation has been an S corporation since inception, describe how its operating distributions to its shareholders are taxed to the shareholders.  

How does the tax treatment of employee fringe benefits reflect the hybrid nature of the S corporation?

When considering C corporations, the IRS checks to see whether salaries paid are too large.  In S corporations, however, it usually must verify that salaries are large enough. Account for this difference.

When an S corporation shareholder has suspended losses due to the tax-basis or at-risk amount limitation, are they allowed to deduct the losses if the S corporation status is terminated? Why or why not? 

How does a shareholder create debt basis in an S corporation?  How is debt basis similar and dissimilar to stock basis?

Is a shareholder allowed to increase their basis in S corporation stock by their share of the corporation’s liabilities, as partners are able to increase the basis of their ownership interest by their share of partnership liabilities?  Explain.

Describe the three hurdles a taxpayer must pass if they want to deduct a loss from their share in an S corporation. What other loss limitation rule may impact the deductibility of losses from an S corporation?

Can a shareholder’s basis in S corporation stock ever be adjusted to a negative number? Why or why not? 

What adjustments are made annually to a shareholder’s basis in S corporate stock and in what order? What impact do these adjustments have on a subsequent sale of stock? 

Why is a shareholder’s basis in an S corporation stock adjusted annually? 

Shawn receives stock in an S corporation when it is formed in a tax-deferred transaction by contributing land with a tax basis of $50,000 and encumbered by a $20,000 mortgage. What is Shawn’s initial basis in his S corporation stock?

How do S corporations report dividends they receive?  Are they entitled to a dividends-received deduction? Why or why not?

Why must an S corporation report separately stated items to its shareholders? How is the character of a separately stated item determined?  How does the S corporation report this information to each shareholder?

Compare and contrast the method of allocating income or loss to owners for partnerships and for S corporations.

Apple Union (AU), a C corporation with a March 31 year-end, uses the accrual method of accounting.  If AU elects to be taxed as an S corporation, what will its year-end and method of accounting be (assuming no special elections)?

On June 1, year 1, Jasper Corporation’s S election was involuntarily terminated.  What is the earliest Jasper may be taxed as an S corporation again?  Are there any exceptions to the general rule?  Explain.

When a corporation’s S election is terminated midyear, what options does the corporation have for allocating the annual income between the S corporation short year and the C corporation short year?

Describe a situation in which a former C corporation that elected to be taxed as an S corporation may have its S election automatically terminated, but a similarly situated corporation that has always been taxed as an S corporation would not.

Describe the circumstances in which an S election may be involuntarily terminated.

Juanita is the sole shareholder of Belize Corporation (a calendar-year S corporation).  She is considering revoking the S election.  It is February 1, year 1.  What options does Juanita have for timing the effective date of the S election revocation?