In: Accounting
Scott Tierney owns 21% of an S corporation. He is confused with respect to the amounts of the corporate AAA and his stock basis. Write a memo to the tax research file, identifying the key differences between AAA and an S shareholder's stock basis.
Memo
Dated: 16th April, 2018
To: Scotty Tierney
From: Name of the student.
Subject: Identification of key differences between AAA and an S shareholders’ stock basis:
The most significant tax benefit to an S Corporation is the tax advantage which accrues to such organizations. At the corporate level an S corporation generally escapes income tax which is not available to a C corporation. The treatment in respect of distributions made by an S corporation is dependent on the shareholder’s basis in S Corporation stock along with the earnings and Accumulated Adjusted Account of such corporation. Accumulated Adjusted Account (AAA) is thus, along with shareholder’s basis in S Corporation are two of the most important elements which determine the tax consequences.
According to section 1368 there are mainly three possible tax consequences that resulted from the distribution of cash by an S Corporation. These three consequences are as following:
The interplay between the two key variables determines the tax consequences for distributions made in S Corporations, these two variables are Stock basis and the corporate level attributes of earnings & profit and AAA.
Thus, it is important to have clear understanding of the above elements to determine the tax consequences of the client, i.e. Scotty Tierney.