Question

In: Economics

6- how does a shareholder  create debt basis in an S corporation? how is debt basis similar...

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

7- when and S corporation shareholder has suspended losses due to the tax basis or at risk amount limitation, is he allowed to deduct the losses if the Corporation status is terminated? why or why not? 

8 - how does the tax treatment of employee fringe benefits reflect the hybrid nature of the S corporation? 

9- How do the tax consequences of S Corporation liquidating distributions differ from the tax consequences of S corporation operating distributions at both the corporate and shareholder levels? 

10- is the LIFO recapture tax a C corporation tax or an S corporation tax? Explain. 

Solutions

Expert Solution

Answer:-

(6). The shareholder is able to create debt basis by lending money directly to the S corporation. Debt basis is similar to a stock basis in the sense that a shareholder may deduct S corporation losses to the extent of both stock basis and debt basis. Debt basis is dissimilar to a stock basis in that distributions are only nontaxable to the extent of stock basis. Thus, distributions received by a shareholder with debt basis but no stock basis are taxable.

(7). Suspended losses are generally not deductible after the S corporation status is terminated. However, there is a post-termination transition period (PTTP) that allows shareholders to utilize suspended losses. The transition period starts on the first day after the last day of the tax year as an S corporation and ends the latter of (1) one year after the S corporations last day or (2) the due date for filing the last return of the S corporation (including extensions).

This rule allows the shareholder to create additional stock basis (by making additional capital contributions) during the PTTP and to utilize suspended losses based on her stock basis (not her debt basis) at the end of the period. Any suspended losses utilized at the end of the PTTP reduce the shareholder's basis in her stock. Any losses not utilized at the end of the period are lost forever.

(8). S corporations are treated in part like C corporations and in part like partnerships with respect to tax deductions for qualifying employee fringe benefits. For shareholder-employees who own 2 percent or less of the entity, the S corporation receives C corporation tax treatment. That is, it gets a tax deduction for qualifying fringe benefits, and the benefits are nontaxable to all employees. For shareholder-employees who own more than 2 percent of the S corporation, it receives partnership treatment. That is, it gets a tax deduction, but the otherwise qualifying fringe benefits are taxable to the more-than-2-percent shareholder-employees.

(9). For operating distributions, S corporations recognize gain but not loss on property distributions and neither gain or loss on cash distributions. Operating distributions are tax-free to the shareholder up to his or her stock basis. Amounts in excess of the stock basis are taxed as capital gains. In contrast, with a liquidating distribution, the S corporation recognizes gains or losses on each asset that is distributed and that gain or loss increases or reduces the owner's stock basis. On the shareholder level, the owners recognize a gain or loss depending on their stock basis in relation to the value of property received

(10). The LIFO recapture tax is technically a C corporation tax that is paid in four annual installments. The first installment is due on or before the due date (not including extensions) of the corporation's last C corporation tax return. The final three annual installments are due each year on or before the due date (not including extensions) of the S corporation's tax return.


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