S CORPORATION INCOME TAX RETURN CHECKLIST FORM 1120S

Transcription

1 Client Name and Number: Prepared by: Date: Reviewed by: Date: 100) GENERAL INFORMATION 101) Consider Federal and State e-filing requirements. 102) Provide the taxpayer with complete Federal and State returns, including consent form(s). 103) Obtain and retain signed consent form(s) for three years. 104) Consider if any conflict(s) of interest exist(s) between the entity and its shareholder(s) and/or officers. 105) Consider obtaining signed:.1) Engagement letter.2) Engagement letter for tax advice under the CPA-client privilege provisions of ) Power of attorney in addition to check-box option. 106) Review and update the S corporation and shareholders names, addresses, fiscal year, incorporation date, business code, identification numbers, and IRS and other tax filing addresses. 107) Review permanent file, prior year returns, memos, workpapers, carryovers and correspondence files. 108) Review pro forma/organizer for accuracy. 109) Has the taxpayer been examined by the Internal Revenue Service, state, or local taxing authority? 110) Consider the following:.1) Obtain copies of the revenue agent s reports..2) Determine that the agent s adjustments have been entered on the taxpayer s records, and appropriate carryover workpapers..3) If the agent s adjustments affect income tax returns of years other than those audited, or the corresponding federal or state returns for the same year, consider filing amended returns..4) Inquire whether the S corporation has informed the shareholders of examination by the IRS or state agency. Page 1 of 33

2 111) Obtain copies of correspondence with the IRS or state taxing authorities and consider impact. 112) Has the taxpayer made or received any below-market-rate term or demand loans? 113) Consider the following:.1) Determine imputed interest consequences..2) Determine existence of a properly executed note..3) Review for adequate stated interest on debt instruments, and:.4) Determine whether the original issue discount or unstated interest rules require the restatement of note interest and principal..5) Consider the election for a purchased discount under ) Review for proper reporting of interest recognition in accordance with Regs and for debt instruments providing contingent payments. 115) If the corporation selected an allowable fiscal tax year, determine that Form 8716 has been timely filed, and that required payments (Form 8752) have been made, if required. Note that a copy of Form 8716 must be attached to Form 1120S for the first taxable year for which the election is made, if required. 116) If the corporation is considering adopting or changing its taxable year (or, in the case of a former C corporation that has recently elected S corporation status retaining a taxable year which is other than a calendar year), see the temporary and proposed regulations under 441, 442, 706, and ) If the corporation is on the cash basis, determine if the accrual basis is required. 118) If the corporation is on the accrual method, consider a change to the cash method. This area has been subject to IRS modifications. 119) Determine that accounting methods are comparable to the preceding year unless changes are approved or required. 120) Review the S Corporation's constructive ownership of other entities (Schedule B). Page 2 of 37

3 121) Review and update schedules for federal and state carryover items (AMT) such as the following:.1) Prior year deferred deductions..2) Installment sales. Consider applicable tax rates for components of gain..3) Changes in accounting methods requiring 481 adjustments..4) Suspended losses or credits due to at-risk limitations..5) Suspended losses due to basis limitations. Update basis schedules accordingly..6) Net unrealized built-in gain..7) The effect of prior tax audits..8) Partnership basis..9) Sect. 179 amounts..10) AE&P from pre-s years. 122) Has the taxpayer issued financial statements? 123) Review financial statements and footnotes for relevant information. 124) Consider the effect of financial statement disclosures under FASB ASC 740, Accounting for Uncertainty in Income Taxes. 125) Review Board minutes. 126) Consider filing power of attorney in addition to check-box option. 127) Consider the rule under 1361(c)(1)(A) that treats stock owned by family members as stock owned by one shareholder. 128) If the return is for a short year, review the related requirements and note the due date. 129) Election/Revocation/Termination of S status 130) Was S or QSUB status elected during the current year? 131) Consider the following:.1) Confirm that IRS (and state if applicable) approval of the election has been received and is in effect for the current year. Page 3 of 37

4 .2) Scheduling potential built-in gains at date of election..3) Requesting relief of an invalid election under 1362(f)..4) Requesting relief for a late election under 1362(b)(5) (Rev. Proc , , and )..5) Scheduling accumulated earnings and profits (AE&P) at the date of the election. 132) Was S status revoked during the current year? 133) Consider the following:.1) Confirm that a revocation was properly filed..2) Determine whether the revocation is effective for the entire year (if filed within the first two and one half months of the year) or prospectively..3) Obtain a copy of the IRS approval letter. 134) Events terminating S status:.1) Determine that no disqualifying event occurred related to an excess number of shareholders, a prohibited type of shareholder, or the issuance of a second class of stock. Consider changes regarding the number of shareholders, the types of shareholders, and safe harbor debt..2) Determine that termination is not triggered by excess passive income for three consecutive years if corporation has C corporation AE&P (note passive income exclusion of dividends from an 80 percent or greater subsidiary attributable to earnings and profit derived from an active trade or business). 135) Was S status terminated or revoked during the year? 136) Consider the following:.1) Verify the allocation method: per day basis or actual. More than a 50 percent cumulative change in stock ownership during the year requires actual cutoff. If less than a 50 percent cumulative change and electing actual, match the election and shareholders consent..2) Consider C corporation estimated tax payments for the succeeding year based on the S corporation s net income. Page 4 of 37

5 .3) Consider requesting relief under the inadvertent termination rule under 1362(f)..4) Consider whether suspended losses were triggered due to a basis increase during post-termination transition period..5) Consider post-termination transition distribution. 137) Does the corporation own a qualified Subchapter S subsidiary (QSub) (TD 8869)? 138) Include all assets, liabilities, and items of income, deduction and credits of the QSub on the return. 139) Note new relief available to inadvertent invalid Subchapter S elections and terminations under 1362(f). 200) INCOME 201) Compare sources and amounts of income with prior year items. 202) Does the taxpayer have portfolio income? 203) Consider the following:.1) Compare sources and amounts of portfolio income with prior year items..2) Review Forms 1099 and year-end statements for dividends, interest and gross proceeds from sales. Segregate qualified dividends..3) Segregate ordinary income, capital gains, and nontaxable interest and dividends..4) Consider ordinary income on market discount bonds and the deferral of related interest expense. 204) Consider the requirement to report separately credit card receipts from other gross receipts and reconcile to Form(s) 1099-K. 205) Determine that only trade or business (for example, not portfolio or rental) income is shown on page 1 of Form 1120S. 206) Does the taxpayer have long-term contracts? 207) See Long-term Contract Checklist. 208) If Installment Sales apply, see Installment Sales Checklist. Page 5 of 37

6 209) Was any property sold, exchanged or involuntarily converted during the year? 210) Was tangible property sold? 211) Consider the following:.1) Reconcile to the depreciation schedule..2) Determine the holding period and federal, state, and AMT bases..3) Determine that gains and losses are properly characterized..4) The recapture of depreciation (including 291 recapture, if applicable) or tax credit, or reduction of credit carry forwards..5) The presumption of capital gain relating to subdivision of land ( 1237)..6) For 1231 gains, determine the amount subject to the ordinary income treatment as a result of the five-year recapture rule for prior net 1231 losses..7) Rules for like-kind and related-party exchanges (Form 8824) (note restrictions on exchange of U.S. property for foreign property). See final regulations under 468B(g), 1031, and 7872 regarding the taxation of qualified escrow accounts, qualified trusts, or funds used during deferred like-kind exchanges. (T.D. 9413, July 9, 2008) (note restrictions for U.S. exchange of foreign property). See also PLR for rules on cars, light-duty trucks, and crossover vehicles and CCA for certain intangible property (note extension of time rules for failed like-kind exchanges with bankrupt qualified intermediary)..8) Gain from distributions of appreciated property..9) The sale of qualified community assets located in renewal communities (CRTRA 2000 effective January 1, 2002 through December 31, 2014). 212) Was intangible property sold? 213) Consider the following:.1) Determine the holding period and federal, state, and AMT bases..2) Determine that gains and losses are properly characterized. Page 6 of 37

7 .3) Determine that sales of securities settled after year-end, with a trade date within current year, are reported this year (note special rules for short sales in 1233)..4) Review application of the wash sale rules..5) Report gains on constructive sales of appreciated financial positions {note exception under 1259 (c)(3)}..6) Election to rollover gain from the sale of qualified small business stock..7) Review application of straddle rules and available elections under 1092, and see final regulation (c)-1..8) The allowable methods of calculating basis on the sale of mutual fund shares..9) If limitations apply for a mutual fund sold within six months of acquisition..10) The effect on basis of nontaxable stock dividends, reinvested dividends and original issue discount (OID)..11) The ordinary income treatment of (1) commodities derivatives sold by commodities derivatives dealers; (2) hedging transactions, and (3) supplies of a type regularly consumed in the ordinary course of business..12) Inquire if securities held by the S corporation became worthless during the year (note that substantial worthlessness of short sale property is a gain recognition event). 214) Did the taxpayer incur a disaster loss or was any property involuntarily converted during the tax year? 215) Consider the following:.1) The forced sale of livestock on account of weather related conditions ( 1033 (e) and (f) and Notices , , , , and )..2) Special rules pertaining to Presidentially-declared disasters..3) Involuntary rules and elections..4) Note extension of replacement period from two to five years if the property is in the Kansas disaster area and the property is compulsorily or involuntarily converted on or after May 4, Page 7 of 37

8 .5) The option to deduct current year qualifying disaster losses on preceding year tax return by filing an amended return..6) Determine the casualty loss limit. 216) Did the taxpayer make any distributions of property?.1) Determine if there have been any distributions of appreciated property to shareholders requiring recognition of gain by the corporation (Sec. 311)..2) Determine that losses realized on distributions to shareholders are not recognized..3) If there are liquidating distributions to shareholders, determine if losses realized are to be recognized {see exceptions under Code Sect. 336 (d)}..4) Determine the tax treatment of income when the taxpayer receives grants. 217) Does the taxpayer have any deferred income and expenses? 218) Consider the following:.1) Include in gross income, as appropriate, income deferred for books in the current year..2) Exclude from gross income, as appropriate, income for books in the current year that was taken into income for tax in a prior year..3) Consider whether there are any advance payments for goods that can be determined under Reg and 455 and 456. Note the information schedule requirements..4) Determine the proper treatment of certain advance payments..5) If a lessor, consider the economic accrual of rent under ) Determine the deductibility of prepaid expenses {see Reg (a)-4(f)}. 219) Exclude tax-exempt (federal or state) income (charge or credit the other adjustments account (OAA)). 220) Accrual basis taxpayers should consider deferral of state or local income or franchise tax refunds. 221) Does the taxpayer have any passive activities? (See the Passive Activity Checklist.) Page 8 of 37

9 222) Consider the following: S CORPORATION INCOME TAX RETURN CHECKLIST.1) Requirements to separate or group activities..2) Disclosure statement for new/changed groupings..3) Elections and/or statements for grouping or aggregating passive activities (Reg )..4) Report rental real estate activities on Form ) Self-charged interest (note final Reg allowing for possible recharacterization of interest income) (see Passive Activity Checklist). 223) Determine if a book/tax adjustment is required for any change in the cash surrender value of key person life insurance. 224) Determine whether income from services does not have to be accrued, if, based on experience, such amounts will not be collected (Sec. 448 (d)(5). 225) For leased vehicles, calculate the appropriate income inclusion amount to be reported by referring to the IRS tables (see vehicle related guides). 226) Did the taxpayer have a debt restructuring during the tax year? 227) Consider the following:.1) Review for possible discharge of indebtedness income ( 61, 108 & 1017)..2) Consider election to treat a nonmaterial modification of debt as new debt (Rev. Procs and )..3) Determine if there has been a "significant modification" {Reg (a)} of the old debt which would constitute a taxable exchange of old debt for new debt. (See also final Reg ).4) If there has been a "significant modification", review the OID rules to calculate possible discharge of indebtedness income. (Note regulations under Sec ).5) Consider exclusion and elections under Sec. 108 (see Reg )..6) Election to defer income from the discharge of indebtedness in connection with a reacquisition on an applicable debt restructuring after December 31, 2008, if extended { 108 (j)}. Page 9 of 37

10 .7) At the end of the deferral period (five years for COD income generated in 2009 and four years for COD income generated in 2010), the income is recognized ratably over the next five taxable years..8) Confirm that there have been no acceleration events requiring the entire COD income to be taken into income in the current year, such as the death, liquidation, or sale of substantially all of the assets of the debtor..9) Consider the state treatment, if different..10) Consider Form ) Do not increase basis for excluded amounts. 228) Inquire if the taxpayer engaged in bartering transactions. 229) Consider the disallowance of losses for transactions with related parties. 230) Consider the mark-to-market rules for dealers in securities under 475 and the related 481 adjustment. 231) Consider the exclusion from income of cash or a rent reduction received from the lessor under a short-term lease of retail space utilized to construct leasehold improvements that will revert to the lessor at termination of the lease. 300) DEDUCTIONS 301) Review the taxpayer s vacation pay policy to determine if a deduction is allowable on the accrual basis (vested at year end and paid within two and one-half months after year end). 302) Does the taxpayer have inventories? 303) Consider the following:.1) Uniform capitalization rules (see Uniform Capitalization Checklist and Sect. 263A adjustment election requirements)..2) The lower of cost or market adjustments..3) A write down of subnormal inventories (note allowable estimated inventory shrinkage)..4) Inventory valuation method election requirement. Page 10 of 37

11 .5) Whether the method of valuing inventory is valid including new rules for the use of the rolling-average method under Rev. Proc ) Are there charitable contributions to consider? 305) Consider the following:.1) If contributions are to qualified charitable organizations..2) Charitable contributions limitations, including limitations for lobbying activities, partial donations of tangible personal property (including art work) and gifts of appreciated ordinary income property..3) The deduction for more than cost of appreciated capital gains property..4) The reduction of the contribution deduction due to value of athletic tickets or token benefits..5) The rules for charitable donations of patents or other intellectual property..6) Enhanced deduction for contribution of food inventory (ATRA 2012)..7) Special rules on donations of conservation and easements (ATRA 2012) { 170(b)(1)(E)}. (TRUIRJCA 2010) 306) Limitations on donations of vehicles exceeding $500 and consider the following:.1) If adequate contemporaneous documentation was obtained for charitable contributions of $250 or more and quid pro quo donations in excess of $75..2) If recordkeeping and substantiation requirements have been met for all cash and property donations..3) If adequate contemporaneous documentation was obtained for charitable contributions of vehicles (note limits on deduction allowed)..4) The exception allowing the deduction of the fair market value of qualified appreciated stock donated to a private foundation..5) Limits on deduction for property disposed of within three years..6) Basis adjustment rules for donations of appreciated property, if extended (TRUIRJCA 2010). Page 11 of 37

12 .7) Special multi-year computations for donations of intellectual property..8) That costs of contributed property held for sale in the course of a trade or business that are incurred in the year of contribution are treated as part of cost of goods sold for such year and are not a charitable contribution subject to the related rules and limitations..9) That minutes document authorization before year end for accrued charitable contributions, and that contributions are paid by the 15th day of the 3rd month after the end of the tax year. An election statement and certified copy of the minutes must be attached to the return..10) If Form 8283 is required for other than cash charitable donations. Note substantiation and appraisal requirements. (Some gifts require the full appraisal to be attached to the return.).11) Denial of the charitable contribution deduction for transfers associated with split-dollar insurance arrangements. 307) Inquire if fringe benefits (including health savings accounts contributions) for more than 2 percent shareholders claimed as deductions by the S corporation have been reported on the recipient shareholders Forms W-2 as wages subject to income tax. 308) Inquire whether the taxpayer can substantiate by adequate records, as required under 274, expenses claimed for entertainment, entertainment facilities, gifts, travel and conventions. Consider optional per diem method and note limitation on deductibility of certain nonemployee travel expenses (see Rev. Proc , Announcement , and Rev. Rul ) (see also Rev. Procs and regarding the ability to use statistical sampling for meals and entertainment expenses that are not subject to the 50 percent limitation) (see Proposed Reliance Regs, REG , 4/26/12, for treatment of local lodging expenses) (see Vehicle Related Guides). 309) Consider limitations on deductions and consider the following:.1) Limit the deduction for meals and entertainment to the allowable percentage and consider exceptions, including employer provided meals and reimbursements. Note limitations for certain expenses in the case of specified individuals and different rules for transportation workers and leased employees..2) Determine the deductibility of club dues..3) Review penalties paid or accrued for deductibility..4) Determine that certain lobbying expenses are not deducted (note exceptions). Page 12 of 37

13 .5) Inquire if dues include nondeductible lobbying expenses..6) Consider limitations for expensing start-up and organizational costs. (T.D & SBJA 2010).7) Consider limitations on the personal use of business aircraft for officers, directors, and greater than 10 percent owners. 310) Determine that expenses allocable to portfolio income have not been deducted on page 1, Form 1120S. 311) For officers and shareholders:.1) Ascertain officer(s) or shareholder(s) compensation and review for reasonableness (Notice )..2) Determine the ownership of life insurance policies and the proper treatment of related expenses..3) Determine split-dollar insurance treatment (see Reg and Notice )..4) Determine deductibility of disability insurance premiums..5) If there were any accruals of interest, compensation or other expenses payable to a shareholder or other related party, determine that for tax purposes the deduction is deferred until the year in which it is includible in income of the shareholder or other related party..6) Consider if compensation to shareholders who perform substantial services for the corporation was sufficient..7) Review the documentation of shareholder loans including adequacy of the interest rate. 312) Determine if compensation deductions are allowable and whether amounts must be included in recipient s W-2 with respect to the following:.1) Current or past transfers of property that are no longer subject to a substantial risk of forfeiture ( 83)..2) Current transfers of property for which a 83(b) election is made..3) Disqualifying dispositions of stock under incentive stock options ( 422)..4) Employee stock purchase plans ( 423). Page 13 of 37

14 .5) The exercise of nonqualified stock options for stock without a readily ascertainable fair market value. 313) Did the taxpayer incur any bad debts during the year? 314) Consider the following:.1) Determine that specific write-off or nonaccrual experience method is used for bad debts for entities other than financial institutions..2) Review partially worthless debt for writeoff under Reg ) Consider bad debt reserve method for financial institutions. 315) Determine if compensation deductions are allowable with respect to qualified and nonqualified stock options. Note: Consider 409A applications if options are priced at less than fair market value at grant. 316) Determine the applicability of the two and one half month deferred compensation rule for nonshareholder employees and independent contractors. 317) Does the taxpayer have interest expense? 318) Consider the following:.1) Determine if interest deduction limitations apply to interest incurred to purchase or carry market discount bonds or short-term debt obligations..2) Treat amortizable bond premium (for bonds acquired after 1987) as an offset to interest income..3) Eliminate interest expense on debts with respect to life insurance policies (purchased after June 20, 1986) on current or former beneficial owners and key employees to the extent that the total of such loans exceeds $50,000. No interest deduction is allowed for new or materially changed contracts issued after June 8, ) Determine that the proper classifications have been made by type (trade or business, investment, passive activity, tax-exempt expenditures, and so on)..5) Determine that the proper allocation of interest expense has been made if the proceeds of a loan were used for more than one purpose..6) Determine if there is an allowable interest deduction related to deferred compensation agreements. Page 14 of 37

15 .7) Capitalize interest and carrying charges on straddles ( 263[g])..8) Determine deductibility of accrued interest on related party loans ( 267)..9) Determine if there is nondeductible disqualified debt interest under 163(1). 319) Did the taxpayer incur any environmental cleanup expenses? 320) If a lessee, determine the proper treatment for long-term leases when leases provide for deferred payments or increasing payments under 467 (see also Reg ). 321) Consider 266 election to capitalize carrying charges (interest, taxes, etc.) on non-productive property (CCA , January 6, 2007). 322) Determine the proper treatment for costs incurred to acquire, create, or enhance intangible assets (Reg (a)-4, 1.263(a)-5 and 1.167(a)- 3(b), T.D. 9107). 323) Determine the proper treatment for costs incurred to acquire, create, repair or enhance tangible assets (Rev. Proc ). 324) Determine the proper treatment for costs incurred to acquire, enhance or repair real propety (Rev. Proc ). 325) Consider the deduction for domestic production activities (ATRA 2012 and TRUIRJCA) (Form 8903). 326) Determine the deductibility of state and local income taxes (note accrual deduction is limited to actual liability and cash basis payment is limited to reasonable prepayments). 327) Determine that retirement plan contributions have been calculated using the eligible compensation limit and were timely made. Obtain a listing of dates and amounts of payments (PACMBPRA 2010). 328) If the taxpayer maintains a profit sharing plan and has not contributed the maximum contribution for each taxable year beginning prior to 1987, calculate the unfunded contribution carryover amount. 329) Determine if deductions should be reduced by credits claimed. 330) Review increases or decreases in reserve accounts for potential book/tax adjustments. 331) Determine if professional fees or employee salaries require capitalization. Page 15 of 37

16 332) Determine applicability of 2 1/2 month deferred compensation rule for nonshareholder employees and independent contractors. 333) Determine if 409A deferred compensation applies to compensation arrangements (see Reg A-1 through 1.409A-6, T.D. 9321, April 10, 2007, corrected July 13, 2007, effective January 1, 2009, and prop. reg. REG , December 8, 2008). 334) Consider limitation on deducting expenses related to federally-taxexempt income. Note that these expenses may be deductible at the state level if the related income is taxable. 335) Consider economic performance requirements including recurring item exception and 3 1/2 month rule. See Reg (d) (6) (ii) and Sec. 461 (h) (3). 400) DEPRECIATION/AMORTIZATION 401) Did the taxpayer place any software in service during the current year? 402) Consider the following:.1) Determine the depreciable basis of each asset..2) Consider off-the-shelf software as eligible for 179 election for tax years beginning before 2013 (ATRA 2012 and TRUIRJCA 2010) (Final Regs. T.D. 9209).3) Determine the applicable convention (half-year, mid-quarter, or mid-month)..4) If a short year, determine that Rev. Proc is followed..5) Consider the 36-month amortization rules for software..6) Election to not claim additional first-year depreciation.. 403) Did the taxpayer place any leasehold improvements in service during the current year? 404) Consider the following:.1) Determine the depreciable basis of each asset..2) Consider 179 election up to $250,000 for qualified real property (qualified leasehold improvements, qualified restaurant property, and qualified retail improvement property) placed in service in tax years beginning before 2014 ( 179(f)(1). ATRA 2012 and SBJA 2010). Page 16 of 37

17 .3) Consider 179D election to expense energy-efficient commercial building property placed in service before January 1, 2014, including abandonment loss for cost of original improvements..4) Determine the applicable convention (half-year, mid-quarter, or mid-month)..5) Determine the property class, recovery period and depreciation method for each asset (note the limitations on property qualifying for income forecast method and designated lives of rent-to-own property)..6) Consider special 15-year straight-line depreciation for qualified leasehold improvements, qualified restaurant property, and qualified retail improvements placed in service before January 1, 2014 (ATRA 2012 and TRUIRJCA 2010)..7) Determine that the cost of leasehold improvements is being recovered over the applicable recovery period regardless of the lease period..8) If a short year, determine that Rev. Proc is followed..9) Consider electing the Alternative Depreciation System (ADS) (straight line over an ADS recovery period) for qualifying General Depreciation System property..10) Consider electing the 150 percent declining balance (DB) method over the recovery periods applicable to the regular tax for tangible personal property otherwise qualifying for the 200 percent DB method..11) Consider reduced depreciable lives for real estate improvements and special use structures..12) Consider cost segregation analysis for building components. Note shorter lives for non-structural components..13) Consider election to not claim additional first-year depreciation..14) Determine if expenditures were incurred that are eligible for the Disabled Access Credit (Form 8826). If the taxpayer does not qualify for the credit or has expenditures in excess of the credit, consider making a 190 election to expense the cost. 405) Did the taxpayer place any real property in service during the current year? Page 17 of 37

18 406) Consider the following: S CORPORATION INCOME TAX RETURN CHECKLIST.1) Determine the depreciable basis of each asset..2) Consider 179 election up to $250,000 for qualified real property (qualified leasehold improvements, qualified restaurant property, and qualified retail improvement property) placed in service in tax years beginning before 2014 ( 179(f)(1), ATRA 2012 and SBJA 2010)..3) Consider 179D election to expense energy-efficient commercial building property placed in service before January 1, 2014, including abandonment loss for costs of original improvements..4) Determine the property class, recovery period and depreciation method for each asset (note the limitations on property qualifying for income forecast method and designated lives of rent-to-own property)..5) Determine depreciation of property received in a like-kind exchange or involuntary conversion (T.D. 9314, February 26, 2007). 407) If a short year, determine that Rev. Proc is followed and consider the following:.1) Consider electing the Alternative Depreciation System (ADS) (straight line over an ADS recovery period) for qualifying General Depreciation System property..2) Consider reduced depreciable lives for real estate improvements and special use structures..3) Consider cost segregation analysis for building components. Note shorter lives for non-structural components..4) Consider depreciation limitations for Industrial Development Bond financed property, and certified historic structures for which a tax credit was taken..5) Consider the seven year depreciable life for motorsports entertainment complexes placed in service before January 1, 2014 (ATRA 2012 and TRUIRJCA 2010)..6) Consider accelerated depreciation for qualifying property located on Indian reservations placed in service before January 1, 2014 (ATRA 2012 and TRUIRJCA 2010)..7) Consider election to not claim additional first-year depreciation. Page 18 of 37

19 .8) Determine if expenditures were incurred that are eligible for the Disabled Access Credit (Form 8826). If the taxpayer does not qualify for the credit or has expenditures in excess of the credit, consider making a 190 election to expense the cost. 408) Did the taxpayer place any listed property in service during the current year? 409) Consider the following:.1) Consider the 179 election to expense qualifying assets (note that expanded allowable amounts and higher limits apply for property placed in service before 2014 (ATRA 2012 and SBJA 2010)..2) Determine the depreciable basis of each asset..3) Determine the property class, recovery period and depreciation method for each asset (note the limitations on property qualifying for income forecast method and designated lives of rent-to-own property)..4) Determine the applicable convention (half-year, mid-quarter, or mid-month)..5) Consider additional first-year depreciation for qualified property (capped at $8,000 for passenger automobiles) placed in service before January 1, 2014 (January 1, 2015 for certain property). (ATRA 2012, TRUIRJCA 2010 and Rev. Proc ). For property acquired in a like-kind exchange or replaced in an involuntary conversion see Regs (i)-6(c)(1), 1.168(i)- 6(c)(3)(ii), 1.168(k)-1(f)(5)(iii)(A), and 1.168(k)-1(f)(5)(vi)..6) Determine depreciation of property received in a like-kind exchange or involuntary conversion (T.D. 9314, February 26, 2007)..7) If a short year, determine that Rev. Proc is followed..8) Consider electing the Alternative Depreciation System (ADS) (straight line over an ADS recovery period) for qualifying General Depreciation System property..9) Consider electing the 150 percent declining balance (DB) method over the recovery periods applicable to the regular tax for tangible personal property otherwise qualifying for the 200 percent DB method. Page 19 of 37

20 .10) For business vehicles, consider the maximum allowable under the luxury auto rules (note exceptions for clean burning, electric vehicles with gross vehicle weight [GVW] of more than 6,000 pounds and qualified non-personal use trucks and vans. {Reg F-6(c)(3)(iii)} (note first-year dollar limitations) (Rev. Proc )..11) For business vehicles, consider the expensing limitations for trucks and vans rated at 14,000 pounds GVW or less..12) Determine limitations if the business usage is 50 percent or less..13) Inquire if the individual has kept the required records indicating the business and personal use of property (note certain travel between home and temporary work locations is considered business)..14) Election to not claim additional first-year depreciation. 410) Did the taxpayer place any other personal property in service during the current year? 411) Consider the following:.1) Consider the 179 election to expense qualifying assets (note that expanded allowable amounts and higher limits apply for property placed in service before January 1, 2014 (ATRA 2012 and SBJA 2010)..2) Determine the depreciable basis of each asset..3) Determine the property class, recovery period and depreciation method for each asset (note the limitations on property qualifying for income forecast method and designated lives of rent-to-own property)..4) Determine the applicable convention (half-year, mid-quarter, or mid-month)..5) Consider additional first-year depreciation for qualified property placed in service before January 1, 2014 (January 1, 2015 for certain property). (ATRA 2012, TRUIRJCA 2010 and Rev. Proc ) For property acquired in a like-kind exchange or replaced in an involuntary conversion see Regs (i)- 6(c)(1), 1.168(i)-6(c)(3)(ii), 1.168(k)-1(f)(5)(iii)(A), and 1.168(k)- 1(f)(5)(vi)..6) Determine depreciation of property received in a like-kind exchange or involuntary conversion (T.D. 9314, February 26, 2007). Page 20 of 37

21 .7) If a short year, determine that Rev. Proc is followed..8) Consider electing the Alternative Depreciation System (ADS) (straight line over an ADS recovery period) for qualifying General Depreciation System property..9) Consider electing the 150 percent declining balance (DB) method over the recovery periods applicable to the regular tax for tangible personal property otherwise qualifying for the 200 percent DB method..10) For farming, determine that MACRS is applied using 150 percent DB (note ADS required if elected out of 263A)..11) Consider accelerated depreciation for qualifying property located on Indian reservations for property placed in service before January 1, 2014 (ATRA 2012 and TRUIRJCA 2010)..12) Consider election under 181(a)(2) to deduct cost of production in the year incurred for qualified film and television productions (ATRA 2012 and TRUIRJCA 2010)..13) Consider accelerated depreciation for racehorses placed in service after December 31, 2008 and before January 1, ) Consider Sect. 179 E election to expense mine safety equipment placed in service before January 1, 2014 (ATRA 2012 and TRUIRJCA 2010).15) Consider election to not claim additional first-year depreciation..16) Determine if expenditures were incurred that are eligible for the Disabled Access Credit (Form 8826). If the taxpayer does not qualify for the credit or has expenditures in excess of the credit, consider making a 190 election to expense the cost. 412) Does the taxpayer have any intangible assets such as goodwill, organization costs, etc.? 413) Determine the following:.1) That amortizable items, including goodwill, are written off over the correct periods..2) That organizational and start-up expenditures are properly expensed and capitalized..3) If recapture rules for 197 intangibles apply. Page 21 of 37

22 414) Does the taxpayer have any tangible or intangible property placed in service in prior years? 415) Consider the following:.1) Review the depreciable basis of each asset..2) Review the property class period, recovery period and depreciation method for each asset..3) Review the applicable convention (half-year, mid-quarter, or midmonth)..4) If a short year, determine that Rev. Proc is followed..5) Determine recapture if business useage has declined to 50% or less..6) For business vehicles, determine limitation if the business usage is 50% or less..7) Inquire if the individual has kept the required records indicating the business and personal use of property (note certain travel between home and temporary work locations is considered business)..8) Consider a change in accounting method under Rev. Proc , as modified by Rev. Proc to correct MACRS lives, methods, etc. and Rev. Proc for automatic consent for an accounting method change for additional first-year depreciation..9) Consider the provision of Rev. Proc to rectify prior year claims of less than allowable depreciation or amortization..10) For tax years beginning before 2014, consider amending returns to make or revoke a 179 election (ATRA 2012 and SBJA 2010)..11) If there has been a purchase price adjustment, see Prop. Reg (d)(3)..12) Consider final and temporary Regs for changes in computing depreciation and amortization (T.D. 9307, December 22, 2006) (see Rev. Proc ). 416) Consider anti-churning rules. 417) Consider change in accounting method for like-kind exchange property under Reg (k)-1(g)(4)(ii). Page 22 of 37

23 418) If property is leased to a tax-exempt entity or used predominantly outside of the United States, consider the possible need to use ADS. 419) Consider enhanced depreciation rules for qualifying nonresidential and residential rental property placed in service in disaster areas and qualified disaster property placed in service in qualified disaster areas. 420) Consider special amortization rules for qualified geological and geophysical expenditures. 421) Determine if interest is payable or receivable under look-back method where income forecast method is used. Note interest calculation change. 422) Consider modifications to the income forecast method of depreciation for property placed in service after October 22, 2004 as it relates to participations and residuals. 423) Determine if leased property should be capitalized. 424) Reconcile the depreciation expense to supporting schedules. 425) Consider state depreciation, if different. 426) Consider AMT and ACE depreciation, if applicable. 427) Is form 4562 required? 428) Complete all questions regarding the personal use of listed property. 429) If costs were incurred during the current year, determine that all amortizable items are separately stated and the proper Internal Revenue Code section is cited. 430) Were any depreciable assets sold, exchanged, demolished or abandoned?.1) Make adjustments for depreciation..2) Consider credit recapture..3) Report depreciation recapture and related investment credit recapture if the taxpayer converted depreciable business assets to non-business personal assets..4) Determine the depreciation allowable for property after usechange ( Reg [i]-4)..5) Consider Rev. Proc for claiming depreciation after disposal of an asset. Page 23 of 37

24 500) TAX COMPUTATION AND CREDITS 501) Tax on excess net passive income:.1) Determine if passive investment income is greater than 25 percent of gross receipts and the S corporation has earnings and profits from any C years (note passive income exclusion of dividends from an 80 percent or greater subsidiary attributable to E&P from an active trade or business). (Capital gains from sale or exchange of stock or securities are no longer considered passive investment income)..2) Consider the election to designate distributions as deemed out of earnings and profits. { 1368(e)(3)}. Note: For tax years beginning after May 25, 2007, AE&P of certain S corporations may be reduced by pre-1983 AE&P to eliminate the tax on excessive net passive income..3) Consider the election to forgo previously taxed income { (f)(4)}..4) Tax on built-in gains applies to prior C corporations that filed an S status election subsequent to 1986 (see Final Regs. T.D. 9180, 70 Fed. Reg. 8727, February 3, 2005, and Final Regs. T.D under 1374). Note SBJA 2010 temporarily reduced the holding period from 10 years to 5 years for tax years beginning in 2011 and this was extended through 2013 under ATRA Consider the following:.a) Disclose the remaining built-in gains on Schedule B..b) Compute the tax at the maximum corporate rate for the net recognized gains for the taxable years (not to exceed Subchapter C taxable income, as adjusted) on the disposition of assets ( 1374)..c) If S election was made after March 30, 1988, determine built-in gain carryover..d) "Built-in" gains tax may be reduced by carry forwards from C corporations years, such as gassoline and special fuel credits, net operating loss, capital loss, business credits, minimum tax credits, etc. 502) Consider C corporation available carryovers. 503) Consider the tax on the last in, first out (LIFO) recapture for C Page 24 of 37

25 corporations electing S status. 504) Consider the tax payable by the corporation from recomputing a prior year investment tax credit as a result of the early disposition of assets acquired in C corporation years. 505) Confirm the amounts and dates of any federal, state, and local estimated tax deposits for the year, prior year overpayments applied, backup withholding, and extension payments. 506) Consider federal (SBJA 2010 and HIREA 2010) and state estimated tax requirements and related electronic filing requirements. 507) Consider credit recapture. 508) Consider expanded carryback and carryover provisions for general business credits for certain taxpayers (SBJA 2010). 509) Is the taxpayer eligible eligible for tax credits? (HIREA 2010, TRUIRJCA 2010, SBJA and HCERA 2010) 510) Consider the following:.1) Foreign tax credit ( 27 and 901). Consider the new foreign tax credit limitation under EJMAA ) Rehabilitation credit (Form 3468) ( 38, 46, and 47)..3) Energy credit (Form 3468) ( 38, 46, and 48)..4) Qualifying advanced coal project credit (Form 3468) ( 38, 46, and 48A)..5) Qualifying gasification project credit (Form 3468) ( 38, 46, and 48B)..6) Qualifying advanced energy project credit (Form 3468) ( 38, 46, and 48C)..7) Qualified fuel cell motor vehicle credit (Form 8910) ( 30B)..8) Alternative fuel vehicle refueling property credit through 2013 (ATRA 2012 and TRUIRJCA 2010) (Form 8911) ( 30C). Note: For property relating to hydrogen the credit expires on December 31, ) Credit for qualified plug-in electric-drive motor vehicles (Form 8834, as revised August 2009) ( 30D)..10) Credit for federal tax paid on fuels (Form 4136) ( 34, 6420, Page 25 of 37

26 6421, 6426, and 6427)..11) Cellulosic biofuels credit (Form 6478) (ATRA 2012, TRUIRJCA 2010 & SBJA 2010)( 40)..12) Biodiesel and renewable diesel fuels credit (ATRA 2012 and TRUIRJCA 2010) (Form 8864) ( 40A)..13) Credit for small agri-biodiesel fuels credit (ATRA 2012 and TRUIRJCA 2010)..14) Credit for increasing research activities for amounts paid or accrued prior to January 1, 2014 (ATRA 2012 and TRUIRJCA 2010) (Form 6765) ( 41).15) Low-income housing credit (Form 8586) ( 42)..16) Enhanced oil recovery credit. Note: This credit is unlikely to apply for 2012 due to the phase-out rule (Form 8830) ( 43)..17) Disabled access credit (Form 8826) ( 44)..18) Renewable electricity, refined coal (ATRA 2012 and TRUIRJCA 2010), and Indian coal production credit (ATRA 2012 and TRUIRJCA 2010) (Form 8835) ( 45)..19) Indian employment credit for tax years beginning before 2014 (ATRA 2012 and TRUIRJCA 2010) (Form 8845) ( 45A)..20) Credit for employer social security and Medicare taxes paid on certain employee tips (Form 8846) ( 45B)..21) Credit for qualified retained worker (HIREA 2010) (Form 5884B)..22) Credit for qualified clinical testing expenses (Orphan Drug Credit) and associated carrybacks and carryovers (Form 8820) ( 45C)..23) New markets tax credit for qualifying investments in a Community Development Entity for tax years beginning before 2014 (Form 8874) ( 45D) (ATRA 2012, TRUIRJCA 2010, and REG , August 11, 2008)..24) Credit for pension plan start-up costs (Form 8881) ( 45E)..25) Credit for employer-provided child care expenses (Form 8882) ( 45F)..26) Credit for maintenance of railroad tracks for tax years beginning Page 26 of 37

27 before 2014 (ATRA 2012 and TRUIRJCA 2010) (Form 8900) ( 45G)..27) Mine rescue team training credit for tax years beginning before 2014 (Sect. 45N) (ATRA 2012 and TRUIRJCA 2010)..28) Credit for production from advanced nuclear power facilities ( 45J)..29) Energy-efficient home credits for homes substantially completed after December 31, 2005 and purchased after 2005 and before January 1, 2014 (ATRA 2012 and TRUIRJCA 2010) (Form 8908) ( 45L)..30) Energy-efficient appliance credit (ATRA 2012 and TRUIRJCA 2010) (Form 8909) ( 45M)..31) Agricultural chemicals security credit (Form 8931) ( 45O)..32) Differential wage payment credit for amounts paid to employees on active military duty through December 31, 2013 (ATRA 2012 and TRUIRJCA 2010) (Form 8932) ( 45P)..33) Carbon dioxide sequestration credit (Form 8933) ( 45Q)..34) Work Opportunity Tax Credit for certified eligible employees who began work before January 1, 2014 (ATRA 2012 and TRUIRJCA 2010) (Form 5884) ( 51)..35) Credit for qualified forestry conservation bonds (Form 8912) ( 54B) (Montana only)..36) Credit for holders of new clean renewable energy bonds (Form 8912) ( 54C)..37) Credit for qualified energy conservation bonds (Form 8912) ( 54D)..38) Credit for qualified zone academy bonds through 2013 (ATRA 2012 and TRUIRJCA 2010) (Form 8912) ( 1397E for bonds issued on or before October 3, 2008; 54E for bonds issued after October 3, 2008)..39) Empowerment zone and renewal community employment credit for qualifying wages paid through December 31, 2013 (ATRA 2012 and TRUIRJCA 2010) (Form 8912) ( 1400N)..40) Credit for Gulf tax credit bonds and Midwestern tax credit bonds (Form 8912) ( 1400N). Page 27 of 37

28 .41) Distilled spirits credit (Form 8906) ( 5011)..42) Credit for small employers offering health coverage (HCERA). 511) Consider eligible small business credits provisions { 38 (c) (5)}. 512) If the corporation is subject to a corporate tax and the taxpayer is part of a controlled group, consider special allocation rules under 1561 and Attach apportionment schedules (Schedule O). 600) SHAREHOLDER INFORMATION (See Final Regs through 5, through 3 and through 4.) 601) Shareholder allocation/limitation:.1) Determine that items of income, deductions, credits, etc. are allocated to the shareholders on a per-share, per-day basis..2) If stock transfers occurred during the year which resulted in a termination of a shareholder s interest, consider allocations based on time of actual occurrence. Attach the affected shareholders and corporation s statement of election..3) Consider transfer of attributes in a divorce property settlement. 602) Consider the following when determining shareholder basis:.1) Determine that equity increases and decreases (Schedule M-2) are properly segregated among accumulated adjustment account (see Rev. Rul for the treatment of premiums on key man life insurance), the other adjustment accounts and shareholders' undistributed previously taxed income..2) Determine that distributions exceeding the accumulated adjustment account for S corporations with E&P from C corporation years are reported (Form 1099-DIV) to shareholders as dividends to the extent of AE&P (note that current year net reductions are disregarded in this computation) (prepare Form 5452 where applicable)..3) Consider electing to treat distributions as being from (AE&P) for tax years beginning after May 25, 2007 (exclude pre-83 AE&P) (Form 5452 required)..4) Determine that gain is recognized and allocated to each shareholder for distribution of appreciated property. Page 28 of 37

29 .5) If a corporation is in bankruptcy or insolvent, determine that basis is not increased for the cancellation of debt that is not treated as an income item..6) Determine whether the election to take losses and deductions against the basis before nondeductible items has been made (Reg [g])..7) Determine that shareholder loans will be treated as economic investment (Oren v. Commissioner, No , 8th Cir., 2/12/04) (see final regs for determining the basis and gain from a reduced basis debt repayment on open account debt (T.D. 9428, October 20, 2008)..8) Consider the new calculation of the basis adjustment due to charitable contributions of appreciated property (ATRA 2012 and TRUIRJCA 2010)..9) Consider triggering of suspended losses by a basis increase during the post-termination transition period..10) Consider distributions from accumulated adjustment account during post-termination period (Form 5452 required)..11) Consider equalization of distributions among shareholders when state composite returns taxes are paid for shareholders by the corporation. 603) If shareholder is an Electing Small Business Trust, see new temporary and proposed regulations in T.D ) K-1 INFORMATION 701) Verify correctness of shareholders names, addresses and identification numbers. 702) Determine that proper and separate reporting have been provided for all appropriate items such as:.1) Ordinary trade or business activities..2) Rental activities..3) Portfolio income and related deductions..4) Dividends (note reporting requirements for different types of ordinary dividends..5) Gains and losses, dates of dispositions, respective holding periods and types of assets sold. Page 29 of 37