Question

I am working on extensive report for my Advanced Corp. Tax class and I am hoping to get a better understanding of the following:

-In order for a corporation to make a valid “S” election, the corporation must be a “small business corporation.” Explain the meaning of “small business corporation” in this context.

-Explain what ‘separately stated items’ are in regards to Partnerships and S corporations? Give an example of ‘separately stated items’ for each type of entity.

-What requirements must be met in order for a corporation to make an effective S election?

-Why is ‘depreciation’ listed twice on Schedule M-1 of an S corporation tax return? (once on line 3 and once on line 6)

-In the S corporation context, what do the acronyms “AAA” and “OAA” stand for? Explain the purpose of both accounts.

-A client of yours is curious as to why a Form 1120-S has a section at the bottom of the first page where tax is calculated. The client understands that an S corporation is a pass-through entity, so the client asks you, “Why is there a tax calculation section at the bottom of the first page of the Form 1120-S?” Please respond to your client.

-Compare and contrast S corporations and LLCs. Be as specific and provide as much detail as possible.

Answer 1

Explain the meaning of “small business corporation” in this context.

Meaning of Small Business Corporation is: It is corporation having not more than 100 shareholders or otherwise satisfying compliances of Inetrnal Revenue Code. It can also be a company receiving money for the capital and surplus totalling not more than $ 1,000,000.It should have all the shareholders individuals and no non resident shareholders.

Explain what ‘separately stated items’ are in regards to Partnerships and S corporations? Give an example of ‘separately stated items’ for each type of entity.

Separately stated items in regards to Partnerships and S corporationas are:

• Section 1231 gains and losses
• Net long-terms and short-term gains and losses
• Charitable contributions
• Taxes to be paid in foreing country
• Tax exempt interest
• Invenstment income and expenses
• Deductions specified in Sectio 179
• Expenses and Incomes related to Real Estate
• Non -deductible expenses

What requirements must be met in order for a corporation to make an effective S election?

Requirements of S election include:

1. Submit a IRS form 2553
2. Employer Identification Number (EIN) is required
3. Form can be filed by the IRS online , by mail or by fax

In the S corporation context, what do the acronyms “AAA” and “OAA” stand for? Explain the purpose of both accounts.

AAA stands for Accumulated Adjsutment Account. It is an adjustment account of S corporation and is also not apportioned among shareholders of the company.

OAA stands for Other Adjustment Account. This adjustment account, in income tax return, reconciles the itmes that have increasing and decreasing effect in the shareholders' stock basis. This account includes all non-taxable incomes and the related expenses of S. corp are deducted.

Compare and contrast S corporations and LLCs.

Basis of Difference	S. Corp	LLC
Type of business	S. Corp is not considered as a type of business entity.	LLC is considered as a business entity which is separate from its members.
Tax Classification	IRS classified businesses as S.corp.	There is no LLC tax classification.