SURGENT S ADVANCED CRITICAL TAX ISSUES FOR S CORPORATIONS ACTS/14/01

Transcription

1 SURGENT S ADVANCED CRITICAL TAX ISSUES FOR S CORPORATIONS ACTS/14/01

2 Table of Contents What is New... 1 Basis and Distribution Rules and Problems... 2 S Corporation Compensation Planning... 3 Selling the S Corporation... 4 Redemptions and Liquidations of S Corporations... 5 Estate-Planning Issues... 6 One Class of Stock and Partnerships... 7 Taxable Year and Accounting Methods... 8 This product is intended to serve solely as an aid in continuing professional education. Due to the constantly changing nature of the subject of the materials, this product is not appropriate to serve as the sole resource for any tax and accounting opinion or return position, and must be supplemented for such purposes with other current authoritative materials. The information in this manual has been carefully compiled from sources believed to be reliable, but its accuracy is not guaranteed. In addition, Surgent McCoy CPE, LLC, its authors, and instructors are not engaged in rendering legal, accounting, or other professional services and will not be held liable for any actions or suits based on this manual or comments made during any presentation. If legal advice or other expert assistance is required, seek the services of a competent professional. Revised May 2014

3 What is New I. Cases and rulings 1 A. S corporations 1 1. Miscalculating basis of S stock 1 2. Basis in S corporation to claim loss 3 3. Health plans 4 4. Deducting health insurance premiums 6 5. Life insurance premiums and proceeds 8 6. Amortizing proprietor goodwill 9 7. Prospective S corporation rental income not passive No more than one class of stock Discretionary payments Capital contributions Professional service businesses Roth IRA ineligible S corporation shareholder S corporation basis limitation on losses Debtor company had no property interest in QSub status 25 B. Final regulations on cancellation of indebtedness income of S corporations In general Final regulations 30 C. S corporation basis issues What is the current state of loans as a means to generate tax basis? Restructuring into a back-to-back loan Debt between S corporations Open account debt advances -- the Brooks case Planning for repayments of loans against which losses have reduced the basis from the face amount Final regulations -- in general What is open account debt? Multiple debts Timing issues Basis adjustment for charitable contributions Planning issues 46 D. S corporation built-in gains tax Pre-ARRA law Temporary reduction in the recognition period 48 E. Employees of S corporations Wages Family employees S corporation planning Transfers to family member Recent cases -- JD & Associates Recent cases -- Watson IRS Fact Sheet on wage compensation for S corporation officers Identifying the factors 57 F NEW relief procedures for late filing of Form Rev. Proc Late corporate classification elections Relief where all returns have been filed as an S corporation How to file Form 2553 under Rev. Proc Supplemental procedural requirements when seeking relief for multiple late elections 63 1-i

4 Basis and Distribution Rules and Problems I. Basis adjustment for shareholders 1 A. In general 1 1. Formation and capital contributions 1 2. Gift 2 B. Operations 2 1. Allocating shares of items of an S corporation to shareholders 2 2. Character of items in pro rata share 4 3. Gross income of a shareholder 5 4. Net-operating-loss deduction 5 5. Special rules limiting the pass-through of certain items of an S corporation 6 C. Basis adjustments 6 1. Increases in basis 6 2. Decreases in basis 7 3. Adjustment priority 8 4. Adjustments for items of income in respect of a decedent Uses 10 D. Shareholder loans and basis In general Guarantees Piggyback loans Nonrecourse debt and the at-risk rules Discharge of guarantee 13 E. Basis restoration in indebtedness In general Restoration of basis Ordering Allocation 14 F. S corporation debt basis final regulations In general What is open account debt? Multiple debts Timing issues 15 II. Distributions 17 A. Distribution by corporation without accumulated earnings and profits Two-tier system Timing of computation of basis Allocation of distribution among shares 18 B. Distributions by a corporation with accumulated earnings and profits In general Accumulated earnings and profits Obtaining earnings and profits Four-tier priority system Computation of accumulated adjustments account The negative accumulated adjustments account Timing of adjustments to AAA Adjustment to AAA for distributions in excess of basis Allocation among distributions Distribution of tax-exempt income Redemptions and AAA Impact of AAA on sale of stock 27 C. Tax treatment to corporation on distributions of property C corporation rules Ordinary income Gain passed through 27 2-i

5 4. Distributions of loss property 27 D. Adjustments to earnings and profits General rule Exceptions 28 E. Election to change dividend priority Consent of shareholders Effect of election 28 F. Distributions after termination of election In general Post-termination transition period Cash Election to treat post-termination distributions as dividends 29 III. Loss limitations 30 A. Basis Limitations on deduction of pass-through items of an S corporation to its shareholders Carryover of disallowed losses and deductions in liquidations, reorganizations, and divisions Discharge of indebtedness 32 B. At risk 33 C. Basis reduction Limitations on deduction pass-through items Ordering Election Allocation Debt basis reductions 37 D. Character of gain on repayment of debt Uncertainty Gain on repayment Ordering Cancellation-of-debt income 38 E. Excess losses Carryover Character 39 F. Excess loss in post-termination transition period In general Post-termination transition period Loans Timing 39 G. At-risk consideration 39 H. Tax planning for loss basis An additional stock purchase A capital contribution A shareholder loan to the corporation 40 2-ii

6 S Corporation Compensation Planning I. General compensation planning 1 A. S corporations -- No E&P 1 1. Getting money out 1 2. Tax consequences of distributions 1 3. Tax consequences of compensation 1 4. Cash distributions versus cash compensation payments 2 B. S corporations -- With accumulated E&P 5 1. Tax consequences of distributions 5 2. Tax consequences of compensation 6 3. Cash distributions versus cash compensation payments 6 II. Reallocation of income among family members 9 A. Power of reallocation 9 1. In general 9 2. Reasonably low compensation 9 3. Reasonably high compensation Persons to whom allocated Reasonableness JGTRRA changes -- In general 12 3-i

7 Selling the S Corporation I. Special problems with S corporations 1 A. Asset acquisitions by S corporations 1 1. In general 1 2. Subsidiary issue 1 3. Allocation 1 4. Built-in gains tax 1 B. Stock acquisitions by S corporations 2 1. In general 2 2. Immediate liquidation 2 3. Section No 338 election 2 C. Sale of assets by the S corporation 4 1. Continuation of the S election 4 2. Accounting issues 4 3. Built-in gains tax 4 D. Sale of stock of an S corporation 5 1. In general 5 2. Allocations 5 3. Basis adjustments 5 4. Post-sale distributions 5 5. Pre-sale distribution 6 6. Double tax 6 7. Acquisition of an S corporation by a consolidated group 6 8. Net investment income tax 8 9. New proposed regulations Allocation of gain or loss on the disposition of a pass-through interest Optional simplified reporting Deferred recognition transactions Information reporting 22 E. Section 338(h)(10) transactions involving S corporations In general Final regulations Nonselling minority shareholders Consent QSub target Installment sales Final 336(e) regulations 27 4-i

8 Redemptions and Liquidations of S Corporations I. Redemptions 1 A. Distribution or exchange 1 1. Distribution 1 2. Exchange 1 3. Consequences of exchange treatment 2 4. Carryover of unused losses by shareholders 3 5. Investment-credit recapture by shareholders and S corporation 4 B. Effect of redemption on income and loss of S corporation 5 1. In general 5 2. Property distributions 5 3. Interest expense 6 4. Allocation of S corporation items in year of redemption 7 5. Effect on accumulated adjustments account 8 6. Effect on accumulated earnings and profits 9 II. Liquidations 10 A. In general Subchapter C rules Procedural limitations 10 B. Consequences to the S corporation In general Liquidation of a qualified Subchapter S subsidiary Effect of pass-through Liabilities in excess of basis Exceptions to the rule of recognition Investment credit Built-in gains tax Allocation of income and loss Passive-investment income 14 C. Consequences to the shareholder In general Basis of property Unused losses Investment-tax credit recapture 15 D. Use of installment sales of assets In general Installment obligations for sale of inventory Related-party rules Characterization of gain Recognition of built-in gains 21 E. Tax planning Liquidation versus continued corporate existence Allocation of purchase price proceeds 27 5-i

9 Estate-Planning Issues I. Basis step-up of S stock 1 A. In general 1 1. Section Nonelective 1 3. Applicable stock 1 B. Income in respect of a decedent (IRD) 2 1. In general 2 2. Partnerships 2 3. Prior rulings 3 C. Effect of basis adjustment on transfers and ownership 5 1. Marital transfers 5 2. Transfers to children 5 3. Losses and distributions 6 D. Redemption of S corporation stock 6 1. Binding buy-sell agreement 6 E. Eligibility 7 1. A domestic corporation 7 2. No more than 100 shareholders 7 3. Type of shareholder 7 4. QSST 9 5. Electing small-business trust Electing small-business trusts -- Guidance One class of stock 16 II. Life insurance and buy-sell agreements 17 A. Basic tax principles Use of basis AAA 18 B. Corporate-owned policies Premiums Basis adjustment Effect on AAA Proceeds 19 C. Split-dollar life insurance and nonqualified deferred compensation In general Double tax Third-party split-dollar Shareholder split-dollar Contributory plans Deferred compensation 22 D. Buy-sell agreements Critical nature Cross-purchase agreements Redemptions 24 6-i

10 One Class of Stock and Partnerships I. Revised one-class-of-stock regulations 1 A. Background 1 1. Final regulations 1 2. Differences 1 3. General rule 1 4. Section 83 2 B. Terms of the governing provisions 2 1. Binding agreements relating to distribution and liquidation proceeds 2 2. Exceptions to identical-rights rule 3 3. Routine commercial contractual arrangements 4 4. Buy-sell and redemption agreements 4 5. Debt instruments 5 II. Uses of partnerships with S corporations 6 A. Advantages of a partnership of S corporations 6 1. Special allocations and preferential distributions 6 2. Investor participation in management 6 3. Passive-loss rules 6 4. Classification concerns 7 5. Receipt of interest for services 7 6. Formation of the entity 7 7. Later transfer of interest in entity 7 8. Avoidance of Subchapter S limitations 8 B. Disadvantages of a partnership of S corporations 8 1. Administrative costs 8 2. Limitation on owners 8 3. Basis in ownership interest 9 4. Conduit nature of entity 9 5. Distributions 9 6. Section 754 adjustment Unitary basis in interest Liquidation in accordance with capital-account balances Validity of a partnership of S corporations 11 C. Alternatives to use of partnership of S corporations Limited partnerships Limitation on number of shareholders Special allocations and preferential distributions Receipt of interest for services Disregarded entities 14 7-i

11 Taxable Year and Accounting Methods I. Taxable year 1 A. General rule 1 B. Section 444 election 1 1. When the election is not required 1 2. Which taxable year can be elected 1 C. How to make the 444 election 2 1. In general 2 2. Back-up election 2 3. Tiered structures 3 D. Termination of the 444 election 3 E. Required payments under In general 3 2. Payment formula 4 3. Net base-year income 4 4. Five-hundred-dollar rule 5 5. Refunds and interest 5 6. Penalties 5 F. General estimated tax reports requirement 6 1. In general 6 2. Computation of estimated tax obligations 6 G. Adopting, changing, or retaining a taxable year 6 1. Automatic approval procedures 6 2. Nonautomatic approval procedures 8 II. Adoption of accounting methods 11 8-i