Chp 15

• 1. Corporations


  A type of business entity that is taxed similarly to a partnership, but has the legal structure of a corporation
• Businesses form an S-corporation to save money on Social Security and Medicare taxes
• 1. corporations have the same pass-through tax treatment as partnerships and LLCs, but have many rules and regulations
• Shareholder in an S-corp performing services


  Cannot be classified as self-employment, and do not have the idea of guaranteed payment
• Income as a shareholder on line 1 schedule K


  Not subject to FICA or Medicare tax or self-employment tax
• Compensation for services performed in an S-corp


  Shareholder has to pay their share of Medicare and Social Security, S-corp has to pay their share
• If no salaries are reported and services have been performed, the IRS will reclassify all income as compensation
• Reporting salary in an S-corp


  There is no defined amount that will keep the IRS happy, even if it is less than the total income
• Reason to form an S-corp


  To save money on Social Security and Medicare taxes, only do it if you have high income (over $500,000)
• Social Security Basis


  An index number that goes up every year, in 2024 it is $168,600
• FICA tax


  6.2% Social Security and 1.45% Medicare, totaling 7.65%, which the employer must match
• State employees in Nevada do not have to pay Social Security tax, but do have to pay Medicare tax
• Self-employment tax


  As an LLC or owned business, you are responsible for both the employer and employee portion of FICA, which is 15.3% on the first $168,600
• The self-employment tax can be deducted by half from wages for federal income tax purposes
• Medicare tax for employees


  1.45% on income up to $200,000, and an additional 0.9% on income over $200,000
• To form an S-corporation

  1. Form a corporation under state law

  2. Make an election on Form 2553 with all shareholders signing

  3. File within the first 75 days of the corporation's existence

  4. Must be a domestic corporation in the US, not foreign

  5. Can only have one class of stock, no preferred stock
• 1. corporation shareholders


  • Must be individuals, certain trusts, and estates, no more than 100 shareholders
  • Ex-spouses are still considered one shareholder
• If an S-corporation does not qualify, it will automatically become a C-corporation the next day
• Partnerships, C-corporations, and S-corporations


  Partnerships and C-corporations cannot hold stock in an S-corporation, but an S-corporation can hold stock in a C-corporation and be a partner in a partnership
• Accumulated Adjustment Account (AAA)


  An account kept by an S-corporation that tracks the tax basis of distributions to shareholders, only significant if the corporation has converted from a C-corporation to an S-corporation or vice versa
• Property contribution to an S-corporation


  The 80% control test must be met, unlike with partnerships
• Appreciated property distribution from an S-corporation


  It would be a taxable transaction at FMV to both the shareholder and the S-corporation, unlike with partnerships
• Not Liquidation of a former C-corporation that converted to an S-corporation if the C-corporation qualifies, can be tax-free liquidation
• If a former C-corporation converted to an S-corporation within the first 5 years, and the S-corporation sells appreciated property from the C-corporation, the S-corporation must pay tax on the built-in gain
• After 5 years of a C-corporation converting to an S-corporation, the built-in gain on appreciated property passes through to the shareholders and is not taxed at the 21% corporate rate
• Qualified Business Income (QBI) deduction


  A 20% deduction available to individuals (not corporations) on certain business income, set to expire in 2025
• Eligible for QBI deduction


  • Self-employment income under a certain amount
  • Certain professions (not accounting, law, etc.) under a certain income threshold
• The only reason to form a S-corp is if you can save money on Social security and Medicare, only do it if high income earn .5M^ (Medicare practice, CPA firm)
• Income is reclassified as compensation


  The IRS treats the income as if it were salary income, even if it was not originally reported as such
• Maximum number of shareholders

  No more than 100 shareholders in a corporation
• Types of shareholders


  Individuals, certain trusts, or estates
• Partnership


  A business structure in which two or more individuals share ownership and control of the business. Partnerships do not pay income tax as a separate entity; instead, the partners report their share of the partnership's income or loss on their individual tax returns.
• C-corporation


  A separate legal entity from its owners, meaning it pays income tax on its profits and its shareholders pay tax on any dividends they receive. C-corporations can issue stock to raise capital.
• S-corporation


  A type of corporation that elects to be taxed as a partnership. This means that the corporation itself does not pay income tax; instead, the shareholders report their share of the corporation's income or loss on their individual tax returns.
• Partnership and C-corporation


  A partnership cannot hold stock in a C-corporation, because a partnership is not a separate legal entity and cannot own property or assets in its own name.
• C-corporation and S-corporation


  A C-corporation can hold stock in an S-corporation, because a C-corporation is a separate legal entity and can own property or assets in its own name.
• S-corporation and partnership


  An S-corporation can be a partner in a partnership, because an S-corporation is a separate legal entity and can enter into contracts and form business relationships with other entities.
• 80% control test


  A requirement that at least 80% of the corporation's stock be owned by individuals, estates, or trusts that are eligible to be S-corporation shareholders