Advanced Tax Strategies for S Corporations

1. Advanced Tax Strategies for S Corporations

2. American Recovery and Reinvestment Act of 2009 Extended carryback period for NOLs arising from small businesses Built-in gain tax not imposed on the 8th, 9th or 10th year of recognition period COD income may be deferred to 2014 and taxed over 5 years Private Activity Bond interest not subject to AMT 1-1

3. 2008 Tax Extenders and AMT Relief Act Tax preparers may use the substantial authority standard in non-tax-shelters R&D credit extended to 2008 and 2009 Incremental credit repealed after 2008 Rules under Rev. Rul. 2008-16 for charitable contributions extended to 2008 and 2009 1-2

4. 1-3 The Small Business and Work Opportunity Tax Act of 2007 • Bank S corporations • Change to reserve method • Bank director shares • Accumulated earnings & profits • ESBT • Sale of QSub stock • More-likely-than-not standard

5. 1-4 The American Jobs Creation Act of 2004 • Increase in number of shareholders • Limit increased to 100 • Family treated as 1 shareholder • Inadvertent termination relief • IRA as an S corporation bank shareholder • ESBT beneficiary defined

6. 1-5 The American Jobs Creation Act of 2004 – Losses • Transfer of suspended loss to spouse • Passive activity losses and at risk amounts for QSSTs

7. 1-6 The American Jobs Creation Act of 2004 – QSub • Inadvertent invalid election relief • QSub information returns • No longer on the no ruling list

8. 3 – Basis in S Corporation Stock • Understand the rules relating to the adjustment of basis in stock by S corporation shareholder • Understand how losses are limited by basis

9. 3-1 Computation of Basis Original basis + Additional capital contribution + Share of separately stated income items + Share of nonseparately stated income and gains + Share of tax exempt income + Excess of deduction for depletion over the basis of the property subject to depletion - Distributions - Share of nondeductible, non-capital expenses - Share of nonseparately stated ordinary loss - Share of separately stated deductions/losses - Shareholder’s deduction for depletion Shareholder’s stock basis not below zero

10. 3-2 Adjustments to Basis • Basis is adjusted in the following order • All positive items • Distributions • Nondeductible, noncapital expenses • Other deductions • Basis is generally computed at year-end • Basis is adjusted per share

11. 3-3 Basis of Indebtedness • Must be direct shareholder debt • Personal guarantees do notincrease basis • Stock basis is decreased by losses first, then basis in debt • Basis in debt is restored before basis in stock

12. 3-4 Economic Outlay • Shareholder acquires basis in debt only if they experience an actual economic outlay • Issue becomes a problem with • Loans from related entities • Back-to-back loans

13. 3-5 Limitation of Deduction of Losses • Amount of losses that can be deducted limited to the sum of the shareholder’s basis in stock and direct loans • Losses limited by Section 1336(d) are carried over indefinitely • Losses carried over only with respect to that shareholder • Losses are then limited by at-risk basis and passive activity rules

14. 4 – Distributions • Be able to apply the rules for cash distributions • Be aware of the rules for property distributions • Understand the ordering of distributions

15. 4-1 Distributions • Distributions are payments to shareholders that are based on stock ownership • No effect on corporate income • Whether or not taxable to the shareholder depends on if the S corporation has AE&P

16. 4-2 Cash Distributions Made byS Corporation without E&P • Tax-free return of stock basis • Distribution reported when received • Gain only if amount received exceeds basis • Distribution reduces basis in stock

17. 4-3 Cash Distributions Made byS Corporation with AE&P • Distributions come out of the following accounts in the order shown • Accumulated Adjustments Account (AAA) • Previously Taxed Income (PTI) • Accumulated Earnings & Profit (AE&P) • Other Adjustments Account (OAA) • Election allowed under Section 1368(d) to take distribution out of AE&P first

18. 4-4 Tax Effect of Distributions • AAA, PTI, and OAA – • Nontaxable to the extent of basis; • Gain in excess of basis • AE&P – • Taxable Dividend; • No effect on basis

19. 4-5 AAA • Balance starts at zero the 1st day of the 1st taxable year after 1982 • Increased by • Nonseparately stated income; • Separately stated items of income and gain; • Excess depletion (other than oil and gas); and • Decreased by • Nonseparately stated loss; • Separately stated items of loss or deduction; • Nondeductible or noncapital expenses; • Cost depletion

20. 4-6 Differences betweenAAA and Basis • The AAA increases and decreases by the same items as basis does each year, except • Tax-exempt income increases basis, but does not increase the AAA • Expenses relating to tax-exempt income reduce basis, but do not decrease the AAA • Federal taxes relating to a C corporation year reduce basis, but do not decrease the AAA • The order that increases and decreases is applied to basis and AAA differs • Losses and deductions (but not distributions) can reduce the AAA below zero. Basis can never have a negative balance

21. 4-7 Property Distributions • Amount Distributed = FMV of property • S corporation must recognize income (but not loss) as if the property had been sold • Sale could be subject to BIG tax

22. 4-8 Post-termination Transition Period (PTTP) • Cash distributions during PTTP applied against basis to the extent of AAA • PTTP begins on the day after the last day as S corporation and ends the later of (1) one year after termination, (2) the due date (including extended date) of final S return or (3)120 days after a final determination (e.g., court decision) that S election was terminated