S corps

Question 1

In S Corp, contributing property when ownership >80% with a liabiity greater than basis, recognize gain.

If contributed soley exchange for stock, it is nontaxable

Answer 1

Question 2

Electing C corp from S Corp in mid year

Allocate income pro rata on a 365 day basis:
i.e: S Corp to C Corp on 274th day of year.
Total income entire year is 182K.
1) 182k/365 = 500/day
2) 500 * 274 days = Total S Corp income
3) Total Income entire year - Total Scorp income = Total C corp income.

Answer 2

Question 3

80%+ shareholder Scorp contributes property with liability. Scorps basis in property = adj basis + any gain.

Gains occur if liab on property is greater then ADJ basis.

If Liab is less than adj basis, ignore. Shareholder does not record loss and Scorp only takes adj basis of property.

The liability is still assumed by the corp and

Answer 3

Question 4

When a shareholder contributes property to a corporation:

Stock basis starts with the property’s adjusted basis.

If the corporation assumes a liability, that liability is treated as debt relief
and reduces the shareholder’s stock basis dollar-for-dollar.

Stock basis formula:
Property basis
- Liability assumed
+ Gain recognized (if any)
= Stock basis

If the liability assumed exceeds the property’s adjusted basis:
- The excess is recognized as taxable gain.
- Stock basis is reduced to zero (never negative).

Losses are never recognized on a controlled property contribution.

Question 5

When a shareholder contributes property to a corporation they control in exchange
for stock, the transfer is non-taxable by default.

Gain is recognized only in two situations:

1) Boot is received (cash or other non-stock property)
- Recognized gain = lesser of:
- boot received, or
- realized gain (FMV − adjusted basis)

2) Liabilities assumed exceed adjusted basis
- Recognized gain = liability assumed − adjusted basis
- This applies even if only stock is received

Key rules:
- Stock itself does not trigger gain
- Losses are never recognized
- Cash, other property, or excess debt relief trigger gain

Answer 5

Question 6

How shareholders recognize gain or loss on complete liquidating distributions
1) + Original adjusted basis
2) +/- Corps G/L on propery distribution (FMV-ADJ basis in property)
3) +/- Share of business net income/loss
4) = Updated stock basis
5) FMV of Property distributed - Updated stock basis = gain

Answer 6

Question 7

Nonliquidating distributions from an S corporation follow two separate rules:

1) At the S corporation level:
- The distribution is treated as if the corporation sold the property at FMV.
- The S corporation recognizes GAIN if FMV > adjusted basis.
- The S corporation NEVER recognizes a LOSS if FMV < adjusted basis.

2) At the shareholder level:
- If the S corporation has no accumulated E&P, the distribution is a return of capital.
- The distribution reduces the shareholder’s stock basis dollar-for-dollar.
- The shareholder recognizes gain only if the distribution exceeds stock basis.
- No loss is ever recognized by the shareholder.

Key anchors:
- S corp: gain yes, loss no.
- Shareholder: taxable only if distribution > stock basis.
- AAA matters only if the S corp has C-corp E&P.

Answer 7

Question 8

S corporation loss limitation rule:

An S corporation shareholder may deduct pass-through losses only to the extent
of the shareholder’s basis.

Shareholder basis consists of:
- Stock basis (cash or property invested), plus
- Debt basis for amounts the shareholder loaned DIRECTLY to the S corporation

Important distinctions:
- Corporate-level debt does NOT increase shareholder basis
- Only shareholder-to-corporation loans create debt basis
- Losses in excess of total basis are suspended and carried forward

Loss deduction formula:
Allowable loss =
lesser of
- shareholder’s pro rata share of the loss, or
- stock basis + debt basis

Answer 8

Question 9

Stock basis rule when contributing property to a corporation:

First determine whether the exchange is non-taxable or taxable.

1) If the contributor owns 80% or more immediately after the exchange (non-taxable):
- Stock basis starts with the adjusted basis of the property contributed
- Reduce stock basis by:
- liabilities assumed by the corporation, and
- FMV of any boot received
- Increase stock basis by any gain recognized

2) If the contributor owns less than 80% after the exchange (taxable):
- Stock basis starts with the FMV of the property contributed
- Reduce stock basis by:
- FMV of any boot received, and
- liabilities assumed by the corporation (if any)

Key anchors:
- 80% control = carryover basis starting point
- <80% control = FMV starting point
- Boot always reduces stock basis
- Losses are irrelevant to stock basis in taxable exchanges

Answer 9

Question 10

Complete liquidation of an S corporation:

Shareholder’s basis in distributed property: =
FMV of property received

Shareholder’s recognized gain/loss: =
FMV of property received
(-) liabilities assumed
(-) updated stock basis

Answer 10

Question 11

Distributions from an S corporation’s accumulated adjustments account (AAA) are generally non-taxable because they represent previously taxed income passed through to the shareholders. However, distributions from accumulated earnings and profits (AEP) from the corporation’s prior C corporation years are taxable.

In other words, if the distribution comes from the AAA, it’s not taxed again. If it comes from AEP, it is taxable. Thus, distributions are non-taxable if treated as coming from the S corporation’s AAA.

Answer 11

Question 12

Calculating Shareholder’s Basis less than 80% ownership

1. Start with the total Fair Market Value (FMV) of all property and cash contributed.
2. Subtract the FMV of any boot (property or cash) received by the shareholder.
3. Subtract any liabilities assumed by the corporation as part of the exchange.

Formula:
Shareholder’s Basis = FMV of contributed property and cash - FMV of boot received - liabilities assumed by the corporation.

SCorps and Corps shareholder basis does not include liabilities (unless direct loan). Only partnerships do.

Answer 12

Question 13

For partners in a partnership, each partner’s basis includes their share of the partnership’s liabilities. This means partners effectively increase their basis by their portion of partnership debt, allowing them to deduct losses and take distributions more flexibly.

For C corporations and S corporations, shareholders do not get basis from the corporation’s liabilities at all. Their stock basis is determined by what they personally invest. In the case of S corporations, shareholders can also get basis from direct loans they make to the S corporation. But they do not receive basis from any general corporate debt.

In short: partners can count their share of partnership debt in their basis, while C and S corporation shareholders count only direct loans

Question 14

Liquidation Gain or Loss Formula for Scorp Shareholder:

1. Start with the total amount realized:
   Amount realized = Cash received + (FMV) of property received - Liabilities assumed
2. Then subtract the shareholder’s final adjusted stock basis from the amount realized:
   Recognized Gain or Loss = Amount realized - Adjusted stock basis

In short, your gain or loss is simply the difference between what you receive in the liquidation and your adjusted stock basis. This will generally be a capital gain or loss.

Answer 14

Question 15

S Corporation Distribution Taxability Formula

1. Start with the total distribution amount.
2. Subtract the current year’s ordinary income (E&P). This portion is not taxed again (BC its from SCORP)
3. Subtract the accumulated adjustments account (AAA) amount. This portion is also not taxed again. (SCORP)
4. Any remaining amount is from accumulated E&P from C corporation years and is treated as taxable dividend income.

In summary:
Taxable Dividend = Total Distribution - Current E&P - AAA

Answer 15