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TOC for T2S

INTRODUCTORY MATERIAL

ABOUT THE AUTHORS. . .

LIST OF SUBSTANTIVE CHANGES AND ADDITIONS

INITIAL S YEAR

Chapter 1: Eligibility

Introduction

KEY ISSUE 1A Meeting the S Corporation Eligibility Requirements.

Eligibility Requirements

Ineligible Shareholders

Number of Shareholders

Beneficial Owner of Stock Is Considered the Shareholder

Domestic Corporation Requirement

Ineligible Corporations

Reelecting S Status after Termination of the S Election

Other Qualification Issues

Using a Checklist to Ensure S Corporation Eligibility

Advantages and Disadvantages of S Status

KEY ISSUE 1B Identifying Trusts and Estates Qualified to Hold S Corporation Stock.

Estates

Trusts

Testamentary Trusts

Only Certain Trusts Are Allowed to Name Successive Beneficiaries

Qualified Subchapter S Trusts

Relief from Missed QSST Election

Electing Small Business Trusts

Relief from Inadvertent Termination Due to Failure to File ESBT Election

A Testamentary Trust's ESBT or QSST Election Can Preserve S Corporation Status

Converting from One Type of Eligible Trust (QSST or ESBT) to the Other

Qualified Retirement Plan Trusts

KEY ISSUE 1C Treating Family Members as One Shareholder.

Treating a Family Group as One Shareholder

Identifying Family Members

Husband and Wife

Counting Shareholders When Shareholders Are Divorced

Exceeding the Shareholder Limit Causes S Election to Terminate

Shareholder Estate

KEY ISSUE 1D Qualified Retirement Plan Trusts.

Qualified Retirement Plans

Employee Stock Ownership Plans (ESOPs)

Individual Retirement Accounts

KEY ISSUE 1E Handling a Partnership with S Corporations as Partners.

An S Corporation Can Own an Interest in a Partnership

Tiered Structures

KEY ISSUE 1F Using a Limited Liability Company with an S Corporation.

LLCs May Elect to Be Treated as Corporations and May Elect S Status.

A Single-member LLC Can Hold S Corporation Stock

An S Corporation Can Own an Interest in an LLC

Changing from S Corporation to LLC

KEY ISSUE 1G Making the Qualified Subchapter S Subsidiary Election.

A Corporation's S Election Terminates When Its Shares Are Acquired by Another Corporation

Qualified Subchapter S Subsidiaries

KEY ISSUE 1H Electing S Status for Certain Banks.

Banks Not Using the Reserve Method for Bad Debts Can Elect S Status

Automatic Accounting Change Procedure

Restricted Bank Director Shares

Other Considerations for Banks

KEY ISSUE 1I Meeting the One-class-of-stock Requirement.

Governing Provisions

Stock versus Debt in an S Corporation

Debt as a Second Class of Stock

Disproportionate Distributions to Shareholders

Employment Agreements and Other Commercial Contractual Agreements

Shares Taken into Account

Shareholder Buy/Sell Agreements and Redemption Agreements

Options and Warrants

Compensation in the Form of Stock and Other Employee Incentive Plans

Nonqualified Deferred Compensation Plans

Effective Date of One-class-of-stock Regulations

Availability of Inadvertent Termination Relief

ILLUSTRATION 1-1: Sample QSST Election

ILLUSTRATION 1-2: Successive Income Beneficiary's Affirmative Refusal to Consent to a QSST Election

ILLUSTRATION 1-3: Sample ESBT Election

Chapter 2: Filing and Repairing the S Election

Introduction

KEY ISSUE 2A Filing the S Election on Form 2553.

Form 2553

S Election Remains in Effect until Terminated

When S Election Form Is Filed

Existing Corporations

Newly Formed Corporations

The S Election Is Made on Form 2553

Sample Form 2553

Persons Required to Consent to the S Election

Obtaining Relief from Omitted Consent of Community Property Spouse

Beneficial Owner

Family Members

Shareholders Acquiring Stock after the S Election Is Filed

Deadline for Filing Shareholder Consents Can Be Extended

Filing the S Election by Mail, Private Delivery Service, or Fax

Where Form 2553 Is Filed

Filing the S Election by Delivering It to an IRS Taxpayer Assistance Center

Practitioners Should Follow Up with IRS, If Necessary

Consequences If Form 2553 Is Not Properly Filed

S Election May Be Revoked before It Becomes Effective

IRS Guidance for Filing Form 2553

KEY ISSUE 2B Determining When the Initial Tax Year Begins.

Beginning of First Year Tax Year for Newly Formed Corporation Electing S Status

Beginning of First Tax Year for C Corporation Electing S Status

Changing the C Corporation's Year before Electing S Status

Selecting the Initial Tax Year

KEY ISSUE 2C Repairing a Late or Invalid S Election.

Waiver of Invalid S Election

Methods of Obtaining Relief from a Late or Invalid S Election

Failure to Obtain Shareholder Consents

Relief for Late Election under Rev. Proc. 2007-62

Relief for Late Election under Rev. Proc. 2003-43

Relief for Late Election under Rev. Proc. 97-48

Requesting a Letter Ruling to Waive the Effect of an Invalid Election

User Fee

Minor Errors Do Not Invalidate the S Election

Closing the First C Year of a Newly Formed Corporation to File a Timely S Election

IRS Guidance for Filing Form 2553

KEY ISSUE 2D Admitting a New Shareholder to S Corporation.

Stock Basis

Pass-through of S Corporation Items

KEY ISSUE 2E Eligible LLC Can Elect S Status.

Classifying LLC as a Corporation Can Be Section 351 Transfer

Eligible LLC Electing Treatment as a Corporation Can Elect S Status

Filing Form 2553 When an LLC Elects S Status

Relief Provisions When Form 2553 or Form 8832 Are Not Timely Filed

Electing S Status by LLC Treated as Partnership

LLC Converting to S Status Must Conform to S Corporation Rules

ILLUSTRATION 2-1: Shareholder and Spousal Consents to S Election

ILLUSTRATION 2-2: Request for Extension of Time to Obtain Shareholder's Consent to S Election

ILLUSTRATION 2-3: Request for Extension to Submit Omitted Shareholders' Consents to S Election

Chapter 3: Incorporation and Capitalization

Introduction

KEY ISSUE 3A Incorporating Tax-free under IRC Section 351.

Section 351 Requirements

Transfers of Money or Other Property (Boot)

Loss Is Not Recognized

Assumption of Liabilities

Characterization of Gain Recognized

Basis to Transferor and Transferee

Holding Period

Bankruptcy and Investment Company Exceptions to the Nonrecognition Rule

Section 351 Transfers to an Existing Corporation

Expenditures Paid to Facilitate a Section 351 Transfer Are Capitalized

KEY ISSUE 3B Incorporating a Proprietorship or Partnership and Electing S Status.

Accounts Receivable and Payable Assumed by Corporation

Cash-basis Accounts Receivable and Payable Assumed by an Accrual-basis Corporation

Basis of Stock and Property Received by Shareholder

Allocation of Transferor Shareholder's Basis and Holding Period

Corporate Basis of Transferred Assets

Incorporating a Partnership

Avoiding Abusive Tax Shelter Transactions

KEY ISSUE 3C Incorporating in a Taxable Transaction.

Incorporation May Be Taxable

Sales Recharacterized as Tax-free Transfers

KEY ISSUE 3D Determining Basis of Transferred and Imported Built-in Loss Property.

Transferred Built-in Loss

Electing to Apply Basis Limitation to the Transferor's Stock Basis

Imported Built-in Loss

KEY ISSUE 3E Avoiding Treatment of Stock as Debt in an S Corporation.

KEY ISSUE 3F Avoiding Recapture of Business Credits.

KEY ISSUE 3G Filing the Initial S Corporation Tax Return, Form 1120S.

Due Diligence and Preparation Checklists

ILLUSTRATION 3-1: Transferor's Disclosure Statement in a Tax-free Incorporation

ILLUSTRATION 3-2: Transferee's Disclosure Statement in a Tax-free Incorporation

ILLUSTRATION 3-3: Computing Recognized Gain and Distributee Shareholder Basis in a Section 351 Incorporation

Chapter 4: Organizational and Start-up Expenses (Preopening Expenses)

Introduction

KEY ISSUE 4A Understanding the Tax Treatment of Organizational Expenses.

Limited Deduction for Organizational Expenses

Corporate Organizational Expenses

Deemed Election to Deduct and Amortize Organizational Expenditures

Electing to Forgo the Deemed Election

Elections Are Irrevocable

Change in Method of Accounting

Commonly Encountered Organizational Expenditures

Expenditures That Do Not Qualify

Cash-basis Corporations

When Does a Corporation's Business Begin?

Presentation of Amortization Expense on Form 1120S

Treatment of Unamortized Organizational Costs When S Corporation Liquidates

KEY ISSUE 4B Understanding the Tax Treatment of Start-up Expenses.

Limited Deduction for Start-up Expenses

Defining the Start-up Period

Identifying New Business Activity

Investigatory Expenses

Start-up Expenses of an Investment Activity

Deemed Election to Deduct and Amortize Start-up Expenditures

Electing to Forgo the Deemed Election

Elections Are Irrevocable

Change in Method of Accounting

Presentation of Amortization Expense on Form 1120S

Disposing of a Trade or Business with Unamortized Start-up Expenditures

Using an S Corporation to Investigate a New Business

KEY ISSUE 4C Distinguishing Organizational and Start-up Expenses from Other Nondeductible Preopening Expenditures.

Asset Acquisition Costs

Significant Long-term Benefits

Construction Costs

ILLUSTRATION 4-1: Sample Filled-in Form 4562 Showing Amortization of Organizational Expenditures

ILLUSTRATION 4-2: Sample Filled in Form 4562 Showing Amortization of Start-up Costs

Chapter 5: Hidden Traps

Introduction

KEY ISSUE 5A Establishing Initial Shareholder Stock and Debt Basis.

Importance of the Initial Stock and Debt Basis Calculation

Initial Stock Basis

Initial Debt Basis

KEY ISSUE 5B Valuing Date-of-conversion Assets for Built-in Gains Tax Purposes.

Inventory

Cash Method Accounts Receivable

Goodwill and Intangible Assets

KEY ISSUE 5C Recapturing LIFO When a C Corporation Elects S Status.

KEY ISSUE 5D Carrying Over Losses and Credits from C Corporation Tax Years.

Carryovers

Counting Carryover Years

Net Operating Losses

Tax Credits

Impact of Ownership Changes

Passive Activity Losses

Section 179

KEY ISSUE 5E Carrying Over Losses When Stock Is Transferred to a Spouse or Former Spouse.

KEY ISSUE 5F Reducing Tax Preference Items.

KEY ISSUE 5G Computing Taxable Income as if the Corporation Were a C Corporation.

Determining When the Computation Is Required

Identifying Potential Adjustments

KEY ISSUE 5H Nonqualified Equity Plans Involving Actual Stock.

KEY ISSUE 5I Providing Fringe Benefits to S Shareholders.

KEY ISSUE 5J Post-year-end Elections That Can Benefit the Shareholders.

ORDINARY INCOME

Chapter 6: Trade or Business Income

Introduction

KEY ISSUE 6A Tracking and Reporting Income by Activity.

KEY ISSUE 6B Reporting Sales and Revenue from Operations.

Merchant Card and Third-party Network Receipts and Sales

Cash Method of Accounting and the Constructive Receipts Doctrine

Inventories and the Accrual Method of Accounting

All-events Test

Income from Long-term Contracts

Advance Payments

Multi-year Service Warranty Income

Prepaid Inventory Sales

Advance Trade Discounts

Returns and Allowances

KEY ISSUE 6C Reporting Dealer Income from Certain Installment Sales.

KEY ISSUE 6D Reporting a Hobby Activity Conducted through an S Corporation.

Hobby Loss Rules Apply to S Corporations

Applying the Rules

Ordering Rules for Claiming Deductions

Safe Harbor Rule Helps Eliminate Uncertainty

Filing Form 5213 to Postpone the Safe Harbor Determination

Form 5213 Extends the Statute of Limitations

Chapter 7: Cost of Goods Sold

Introduction

KEY ISSUE 7A Recognizing the Methods for Valuing Inventory.

When Inventories Are Required

Accrual Method of Accounting

Small Taxpayer Exceptions

What Is Included in Inventory

Tax versus Accounting Rules

Cost and Lower of Cost or Market Methods

Inventory Write-downs

Shrinkage Estimates

Alternate Inventory Valuation Methods

KEY ISSUE 7B Electing and Revoking the LIFO Method.

LIFO Method

LIFO Election

Section 472(d) Adjustment

Revocation of LIFO Method

LIFO Recapture When a C Corporation Elects S Status

LIFO Method Is Incompatible with IFRS

KEY ISSUE 7C Capitalizing Inventory Costs under the UNICAP Rules (IRC Sec. 263A).

KEY ISSUE 7D Computing Cost of Goods Sold (Form 1125-A).

Form 1125-A

Completing Form 1125-A

Reporting Materials and Supplies under the Small Taxpayer Exception

KEY ISSUE 7E Other Inventory Issues.

Built-in Gains Tax

Contributions of Food Inventory

Withdrawal of Inventory for Personal Use

ILLUSTRATION 7-1: Electing to Use LIFO Inventory Method

ILLUSTRATION 7-2: Cost of Goods Sold Calculation for Taxpayer Using Cost Method and FIFO

ILLUSTRATION 7-3: Reporting Deductible Materials and Supplies under the Small Taxpayer Exception

Chapter 8: Nonbusiness Income

Introduction

KEY ISSUE 8A Reporting Portfolio Income on Schedule K-1.

KEY ISSUE 8B Separately Stating Tax-exempt Income.

KEY ISSUE 8C Reviewing Life Insurance Proceeds.

KEY ISSUE 8D Reviewing the Potential Traps from Passive Investment Income.

KEY ISSUE 8E Reviewing the PAL Rules Relating to Rental Income.

PAL Relief for Active Participation in Real Estate Rentals

PAL Relief for Participation in Real Property Trades or Businesses

Passive Investment Income

KEY ISSUE 8F Hobby Income.

KEY ISSUE 8G Reporting Payments Made in the Course of Certain Rental Real Estate Activities.

Reporting Requirement

Expanded Reporting Repealed

ILLUSTRATION 8-1: Items of Tax-free Income

ASSET DISPOSITIONS

Chapter 9: Installment Sales and Like-kind Exchanges

Introduction

KEY ISSUE 9A Understanding Installment Sales--General Rules and Limitations.

Installment Sales

Installment Reporting

Reporting Installment Gain on Schedule D and Form 4797

KEY ISSUE 9B Installment Sales Cannot Be Used to Avoid the Built-in Gains Tax.

KEY ISSUE 9C Reporting Installment Sales to Related Parties.

Sales to Related Parties

Depreciable Property Rule

Resale Rule

KEY ISSUE 9D Applying the Interest-charge on Installment Receivables over $5 Million.

KEY ISSUE 9E Reporting Dealer Income from Certain Installment Sales.

Dealer Dispositions

Property Used or Produced in Farming Business

Residential Lots and Timeshares

KEY ISSUE 9F Electing Out of Installment Reporting.

Corporate-level Election

When to Consider Making the Election Out of Installment Reporting

KEY ISSUE 9G Repossessing Property Sold on Installment Basis.

KEY ISSUE 9H Disposing of Installment Obligations.

Taxable Dispositions

Special Rules for Distributions in Liquidations

Character of Gain

KEY ISSUE 9I Recognizing Installment Sales with Insufficient Interest.

KEY ISSUE 9J Understanding Like-kind Exchanges--General Rules.

Like-kind Property

Effect of Boot on Exchange

Basis of Property Received in a Like-kind Exchange

Depreciation

Holding Period

Reporting Like-kind Exchanges

Related-party Exchanges

Built-in Gains

KEY ISSUE 9K Reporting Like-kind Exchanges of Personal Property.

General Nonrecognition Rules for Personal Property

Depreciable Tangible Personal Property

Intangible Personal Property and Nondepreciable Personal Property

KEY ISSUE 9L Understanding Exchanges of Multiple Properties.

KEY ISSUE 9M Understanding Deferred Exchanges.

Primary Requirements for Deferred Exchanges

Safe Harbor Security Arrangements

Reverse Like-kind Exchanges

Multiple-party Exchanges

ILLUSTRATION 9-1: Reporting Related-party Installment Sales

ILLUSTRATION 9-2: Gain on Like-kind Exchange and Basis of Property Received

ILLUSTRATION 9-3: Sample Filled-in Form 8824 for Like-kind Exchange

ILLUSTRATION 9-4: Reporting Related Party Disposition of Property on Form 8824

Chapter 10: Trade or Business Property Transactions

Introduction

KEY ISSUE 10A Applying the Capital Gains Tax Rules.

Two Categories of Pass-through Items

Capital Gains

Collectibles Gain

Qualified Small Business Corporation Stock

Specialized Small Business Investment Companies

KEY ISSUE 10B Deferring Gain on Involuntary Conversions.

Involuntary Conversion Gains and Losses

Definition of Similar Property

Replacement Period

Obtaining an Extension of the Replacement Period

Reporting Gain When Converted Property Is Not Replaced within Allowable Period

Special Like-kind Rule for Condemned Real Property

Replacement Property in Disaster Areas

Related Parties

KEY ISSUE 10C Reporting Casualty and Theft Losses of Business Property.

Casualty Losses

Theft Losses

Deducting a Casualty or Theft Loss

Insurance Proceeds or Other Reimbursements

When to Report Casualty and Theft Losses

Election to Report Declared Disaster Losses in Prior Year

Taxpayers Experiencing Financial Loss

Fraudulent Investment Schemes

Passive Activities

Section 1231 Gains and Losses

Business Property Partly Used for Personal Purposes

KEY ISSUE 10D Deducting Qualified Disaster Expenses.

KEY ISSUE 10E Understanding Abandonments of Business Property.

Abandonment Losses

Reporting an Abandonment Loss

Transaction with Shareholder Treated as a Sale Rather Than an Abandonment

KEY ISSUE 10F Computing Depreciation Recapture.

Depreciation Recapture

Disposition of Multiple Properties in the Same Transaction

KEY ISSUE 10G Determining Gain from Disposition of Certain Natural Resource Property or Stock of an S Corporation That Owns Such Property.

Disposition of Natural Resource Property

Disposition of Stock in an S Corporation

KEY ISSUE 10H Understanding Nonrecaptured Section 1231 Loss Carryovers.

KEY ISSUE 10I Applying the Basis Limitations on Imported and Transferred Built-in Loss Property.

Imported Built-in Loss Property

Transferred Built-in Loss Property

KEY ISSUE 10J Allocating the Purchase Price When a Business Is Bought or Sold.

Section 1060 Allocation Rules

Assets That Constitute a Trade or Business

Procedure for Allocation of Purchase Price

Reporting Requirements

ILLUSTRATION 10-1: Completed Form 4684 Reporting a Business Casualty Loss

ILLUSTRATION 10-2: Completed Form 4797 Reporting an Abandonment Loss

ILLUSTRATION 10-3: Sample Filled-in Form 8594 for Allocation of Assets

Chapter 11: Debt Discharge Income and Foreclosures

Introduction

KEY ISSUE 11A Understanding the Debt Discharge Income Rules for Solvent S Corporations.

Taxable Debt Discharge Income

New Debt Instrument Issued in Satisfaction of an Existing Debt

Acquisition of Debt by a Related Party

Stock Issued for Debt

KEY ISSUE 11B Understanding the Debt Discharge Income Rules for Bankrupt or Insolvent S Corporations.

Special Rules for Bankrupt or Insolvent Taxpayers

Understanding the Effects of Filing a Bankruptcy Petition

Amount Excludable from Gross Income

Calculating Insolvency When the Taxpayer Has Nonrecourse Debt

Reduction of Tax Attributes

Basis Reduction Elections

Ordering Rules for Basis Reduction

Overall Attribute Reduction Limitation

Timing of Attribute Reduction

Stock Issued for Debt

KEY ISSUE 11C Applying the Special Debt Discharge Income Rules for Real Property Business Debt.

Election Required

Basis Reduction

Limitations

Reporting

KEY ISSUE 11D Applying the Special Debt Discharge Income Rules for Qualified Farm Indebtedness.

KEY ISSUE 11E Reducing Purchase Money Debt.

KEY ISSUE 11F Applying the Rules to Shareholder Loans to S Corporations on Repayment, Contribution to Capital, or Exchange for Stock.

KEY ISSUE 11G Understanding Foreclosure by Lender Involving Recourse Debt.

Foreclosure or Deed in Lieu of Foreclosure

Qualified Real Property Business Debt Election

KEY ISSUE 11H Understanding Foreclosure by Lender Involving Nonrecourse Debt.

KEY ISSUE 11I Electing to Defer and Ratably Recognize Income from Debt Reacquisition.

Election to Defer Recognition of COD Income

Effect of the Election

Applicable Debt Instruments

Eligible Debt Reacquisition Transactions

Allocation of Deferred COD Income to Shareholders

Making the Election

Annual Information Statements

Basis Adjustments

Accumulated Adjustments Account

Practical Considerations

KEY ISSUE 11J Reporting Debt Discharges on Forms 982 and 1099-C.

Form 982

Form 1099-C

ILLUSTRATION 11-1: Election to Exclude Income from Discharge of Qualified Real Property Business Debt

DEDUCTIONS

Chapter 12: Compensation

Introduction

KEY ISSUE 12A Deducting "Reasonable" Officer and Employee Compensation.

Compensation Must Be Reasonable

Compensation for Shareholder-employee's Services Is Wages

Factors for Determining Reasonable Salaries

Increasing or Reducing Salaries for Tax-savings Purposes

Paying a Year-end Bonus

Making Up for Prior Year Undercompensation

Compensating Professionals in a Professional Services Firm

IRS Enforcement of Adequate Shareholder Compensation

Setting and Supporting Reasonable Compensation

Noncash Compensation

Reporting Compensation on Form 1120S

KEY ISSUE 12B Reclassifying Compensation Disguised as Distributions or Other Payments.

Shareholder-officers of an S Corporation Are Employees

Compensation Disguised as Distributions

Consequences of Failing to Withhold and Remit Income and Employment Taxes

Employment Contract Does Not Avoid Reasonable Salary Requirement

Distributions to Corporate Officers May Be Wages

Compensation Disguised as Loans to Shareholders

Compensation for Services Is Not Self-employment Income

IRS Guidance on Reasonableness of Compensation

KEY ISSUE 12C Deducting Accrued Shareholder Compensation under the Matching Principle.

KEY ISSUE 12D Paying Compensation in the Form of Stock and Other Employee Incentive Plans.

Issuing Stock to Compensate Employees

Unrestricted Stock

Restricted Stock

Stock Options

Deferred Compensation Plans

KEY ISSUE 12E Denying Independent Contractor Treatment to Shareholder-officer.

KEY ISSUE 12F Temporary Tax Credit for Wages Paid to Certain Employees.

KEY ISSUE 12G FICA Tax Reduction for Employees in 2011.

ILLUSTRATION 12-1: Employee's Election to Treat Receipt of Restricted Stock as Current Compensation

Chapter 13: Bad Debt Losses

Introduction

KEY ISSUE 13A Understanding Business versus Nonbusiness Bad Debts.

Two Classes of Bad Debt Losses

Tax Return Presentation

KEY ISSUE 13B Determining the Amount and Timing of a Bad Debt Deduction.

Amount and Timing

Specific Charge-off Method

Statute of Limitations

KEY ISSUE 13C Loaning Funds to Shareholders and Related Parties.

Bad Debts

Bona Fide Debt

Loans Payable to and Receivable from a Shareholder

KEY ISSUE 13D Claiming a Bad Debt Deduction when an S Corporation Acts as a Guarantor.

S Corporation Acting as Guarantor

Right of Subrogation

KEY ISSUE 13E Applying the Nonaccrual-experience Method for Service Providers.

Nonaccrual-experience Method

Safe Harbors

Periodic Systems

Chapter 14: Taxes and Interest

Introduction

KEY ISSUE 14A Deducting Taxes and Interest.

Deducting Taxes

Deducting S Corporation Taxes

Deducting Payroll Taxes

Identifying Taxes That Are Not Deductible

Deducting Interest

Deducting Interest on S Corporation Tax Deficiencies

Identifying Interest That Is Not Deductible

Deducting Prepaid Expenses

KEY ISSUE 14B Deducting Real Property Taxes.

Economic Performance Rule

Recurring Item Exception Election

Ratable Accrual Election

Apportioning Real Property Taxes between Buyer and Seller

KEY ISSUE 14C Deducting State Income Taxes Incurred by S Corporations.

State Recognition of Federal S Election

Corporate-level Tax

Payments on Behalf of Shareholders

KEY ISSUE 14D Capitalizing Certain Taxes.

Sales Taxes

Assessments for Local Benefits

UNICAP Rules

Election to Capitalize

KEY ISSUE 14E Applying the Interest Tracing Rules.

Debt Proceeds Are Traced to Determine Character of Interest Expense

Debt Proceeds Used to Pay Interest

Temporary Regulations

KEY ISSUE 14F Deducting Interest Incurred to Purchase Stock or Inject Capital into an S Corporation.

Debt Incurred to Inject Capital into an S Corporation

Debt Incurred to Finance the Purchase of S Stock

Effect of Applying the Debt Allocation Procedure

Interest Allocable to a Trade or Business Activity

Debt Attributable to Former S Corporation

Trade or Business Deduction for Interest Paid by Shareholder

Passive Activity Loss Rules

KEY ISSUE 14G Making Debt-financed Distributions to Shareholders.

KEY ISSUE 14H Reporting Investment Interest.

Investment Interest Expense

Reporting on Schedules K and K-1

KEY ISSUE 14I Capitalizing Certain Interest Expense.

Requirement to Capitalize Interest

Designated Property

Avoided-cost Method

KEY ISSUE 14J Calculating Forgone Interest on Below-market Shareholder Loans to S Corporations.

Corporation/shareholder Below-market-interest Loans

Use a Three-step Process to Apply the Below-market-interest Loan Rules

STEP 1 Determine If the Transaction Produces a Below-market Loan

STEP 2 Calculate the Amount of Forgone Interest

STEP 3 Determine the Character and Timing of the Deemed Transfers

Imputed Interest May or May Not Be a Wash

Reporting Requirements

Deductibility of Interest on Below-market Corporation/shareholder Loans

Summary

KEY ISSUE 14K Interest Paid by Shareholders or Corporation on S Corporation Tax Deficiencies.

ILLUSTRATION 14-1: Shareholder's Schedule E Reporting Interest Expense Allocable to the Purchase of S Stock

ILLUSTRATION 14-2: Shareholder's Schedule E Reporting Interest Expense Allocable to an Investment in a Passive Activity

ILLUSTRATION 14-3: Interest Expense on Debt-financed Distributions

ILLUSTRATION 14-4: Investment Interest Expense and Related Items

ILLUSTRATION 14-5: Shareholder Capitalization of Pass-through Interest

Chapter 15: Depreciation and Depletion

Introduction

KEY ISSUE 15A Electing a Depreciation Method.

Determining Allowable Depreciation Deduction

Special Recovery Periods for Certain Assets

Listed Property

Filing Form 4562

AMT Adjustment

Depreciating Leasehold Improvements and Restaurant Property

Using Capitalization Floor for Lower-priced Assets

Capitalization of Tangible Assets

Expensing Costs to Remove Architectural Barriers

Depreciating Real Estate

Mid-month, Half-year, and Mid-quarter Conventions

Depreciation in Year of Acquisition or Disposition.

MACRS Property Acquired in a Like-kind Exchange or as a Result of an Involuntary Conversion

Converting Personal Use Property to Business Use Property, and Vice Versa

KEY ISSUE 15B Claiming First-year Bonus Depreciation.

Identifying Qualified Property

Only New Assets Are Eligible

Acquisition Date Must Be within Applicable Period

Placed-in-service Deadline

Reporting Bonus Depreciation

Coordination with Other Depreciation Rules

Electing Out of Bonus Depreciation

KEY ISSUE 15C Deducting Depreciation in Short Tax Years.

KEY ISSUE 15D Depreciating Automobiles.

Automobiles, Trucks, and Vans

Section 179 Limitation on SUVs

Depreciation Limits

Qualified Business Use

Reporting Depreciation on Form 4562

Corporate Deduction for Employer-provided Autos

Like-kind Exchanges of Autos

KEY ISSUE 15E Claiming the Section 179 Deduction at S Corporation Level.

Eligibility Requirements

Compared with Bonus Depreciation

The Dollar Limitation

Section 179 Deduction for Real Property

The Property-placed-in-service Limitation

Fiscal-year Issue

The Taxable Income Limitation

Carrying Over Deductions Exceeding Taxable Income Limit

Apportionment of Section 179 Limitations among Members of a Controlled Group

Mid-quarter Convention

Making and Revoking the Section 179 Election

Recapture of the Section 179 Deduction

KEY ISSUE 15F Applying the Percentage Depletion Limitations.

Percentage Depletion for Marginal Properties

Property-by-property Reporting

Reporting Oil and Gas Operations to S Shareholders

KEY ISSUE 15G Capitalizing and Amortizing Intangible Assets.

Requirement to Capitalize

Amortization of Purchased Intangibles under Section 197

Section 197 Intangible Defined

Reporting Amortization Expense

Disposition of Section 197 Intangibles

KEY ISSUE 15H Correcting Overstated or Understated Depreciation and Amortization Deductions.

ILLUSTRATION 15-1: Schedule K-1 and Form 4797 Reporting Disposition of Property with Section 179 Recapture

ILLUSTRATION 15-2: Completed Form 4562 Showing Auto Depreciation

ILLUSTRATION 15-3: Completed Form 4562 Showing Section 179 Deduction and Bonus Depreciation

ILLUSTRATION 15-4: Completed Form 4562 Showing Amortization of Section 197 Assets

ILLUSTRATION 15-5: Comparing Bonus Depreciation and Section 179 Deduction

Chapter 16: Fringe Benefits and Retirement Plans

Introduction

KEY ISSUE 16A Deducting Taxable and Nontaxable Fringe Benefits.

Compensation Must Be Reasonable

2% Shareholder Rule

Nontaxable Fringe Benefits

Tax Treatment of Nontaxable Fringe Benefits

Section 132 (Statutory) Fringe Benefits

Reporting Nontaxable Fringe Benefits

Taxable Fringe Benefits

Tax Treatment of Taxable Fringe Benefits

Payroll Taxes and Federal Income Tax Withholding

Reporting Taxable Fringe Benefits

Summary of Partner versus Employee Treatment

Valuing and Deducting Taxable Noncash Fringe Benefits

Special Accounting Rule for Taxable Noncash Fringe Benefits

Failing the Nondiscrimination Requirements

Other Issues

KEY ISSUE 16B Deducting Self-employed Medical Insurance for S Shareholders.

Deduction Allowed

Earned Income Limitation

Family Attribution Rules

IRS Guidance on Deducting Health Insurance Premiums

Medicare Premiums Qualify for Self-employed Health Insurance Deduction

KEY ISSUE 16C Deducting Contributions to Retirement Plans.

S Corporations Can Establish Qualified Retirement Plans

Retirement Plans Common to S Corporations

Deducting Contributions

Reporting the Deduction

Entities under Common Control

KEY ISSUE 16D Deducting Contributions to Simplified Employee Pensions (SEPs) and Simple Retirement Plans (SIMPLEs).

Simplified Employee Pensions

SIMPLE Retirement Plans

KEY ISSUE 16E Understanding Employee Stock Ownership Plans (ESOPs).

KEY ISSUE 16F Understanding the Prohibited Transaction Rules for Qualified Plan Loans to S Shareholders.

KEY ISSUE 16G Deducting Payments to Nonqualified Deferred Compensation Plans.

Employer's Deduction

Built-in Gains Tax Implications

KEY ISSUE 16H Small Employer Health Insurance Is Eligible for Tax Credit.

KEY ISSUE 16I Cafeteria Plans.

Cafeteria Plans Offer Multiple Benefits

Treatment of 2% Shareholders

Simple Cafeteria Plans

ILLUSTRATION 16-1: Fringe Benefits Comparison Chart

ILLUSTRATION 16-2: Schedule K-1 Reporting Medical Insurance Premiums Paid on a Shareholder's Behalf

Chapter 17: Travel and Entertainment

Introduction

KEY ISSUE 17A Using Employee Reimbursement and Other Expense Allowance Arrangements.

Reimbursements and Other Expense Allowance Arrangements

Substantiation Requirements

Per Diem Method of Substantiating Travel Expenses

Alternate High-low Per Diem Method

Related Party/10% Shareholder Limitation

KEY ISSUE 17B Applying the 50% Limitation on Meal and Entertainment Deductions.

50% Limitation Rules

Reporting the Disallowed Portion of Meals and Entertainment Expenses

KEY ISSUE 17C Limiting Deductions for Entertainment Facilities and Club Dues.

Entertainment Expenses

Entertainment Facilities

Clubs as Entertainment Facilities

Club Dues

Reporting Club Dues

KEY ISSUE 17D Deducting Cost of Tickets to Athletic Events and Skybox Rentals.

Tax Treatment Depends on Whether an Employee Attends the Event with the Customer

Deduction Limitations

KEY ISSUE 17E Comparing Travel and Transportation Expenses.

Travel and Transportation Distinguished

Travel Expenses

Transportation Expenses

Employee's Personal Auto Used for Corporate Business

Corporate Deduction for Employer-provided Autos

Reporting Requirements

KEY ISSUE 17F Limiting Deductions for Automobile Leases.

Inclusion Amount

Partial Business Use of Leased Auto

KEY ISSUE 17G Valuing Noncommercial Flights on an Employer's Aircraft.

Valuing Flights on Business Aircraft

Valuing Entertainment Use of Business Aircraft

Chapter 18: Other Deductions

Introduction

KEY ISSUE 18A Claiming the Domestic Production Activities Deduction.

Deduction for Domestic Production Activities

Reduced Deduction for Oil-related Income

Recognizing and Understanding the Key Terms and Abbreviations

Identifying Qualified Production Property

Identifying Activities Eligible for the Deduction

Activities That Include Only Sales or Services Generally Do Not Qualify

Identifying Manufactured, Produced, Grown, or Extracted (MPGE) Activities

Meeting the In Significant Part Requirement

Meeting the In the United States Requirement

Construction Activities

Identifying Engineering or Architectural Services

Food or Beverage Sales

Determining Domestic Production Gross Receipts

Computing Gross Receipts

Allocating Gross Receipts

Allocating Costs to Gross Receipts

Allocating Cost of Goods Sold

Allocating Other Deductions and Costs

Using Statistical Sampling to Make Allocations

Determining W-2 Wages

AMT Implications

Determining Qualified Production Activities Income

Computing the Deduction

Applying the Special Section 199 Pass-through Rules

Effect of Section 199 Deduction on Basis

Reporting the Deduction

KEY ISSUE 18B Passing Charitable Contributions through to Shareholders.

S Corporation Charitable Contributions Are Not Deducted at Corporate Level

Passing Through Property Contributions Other Than Cash

Contributions of Food Inventory

Qualified Conservation Easements

Effect on Stock Basis

Effect on AAA

Substantiation Requirements

Reporting Requirements

Timing of the Charitable Contribution Deduction

Special Rule When Donor Receives the Right to Athletic Event Tickets

Charitable Contributions Passed through to an ESBT

Effect of Charitable Contributions on Built-in Gains Tax

KEY ISSUE 18C Reporting Rental Expense Paid in Advance.

KEY ISSUE 18D Reporting Directors' Fees and Expenses.

Directors' Fees Are Reported on Form 1099-MISC

Directors' Fees Are Earnings from Self-employment

KEY ISSUE 18E Recovering Previous Deductions--the Tax Benefit Rule.

Tax Benefit Rule Applies When Subsequent Events Show Deduction Was Incorrect

ILLUSTRATION 18-1: Schedules K and K-1 Reporting Domestic Production Activities Deduction Information

ILLUSTRATION 18-2: Filled-in Form 8903 Reporting the Corporation's Domestic Production Activities Deduction Information

TRANSACTIONS WITH SHAREHOLDERS

Chapter 19: Shareholder Stock Basis

Introduction

KEY ISSUE 19A Maintaining Accurate Basis Records.

Initial Basis in S Corporation Stock

Tracking Basis

KEY ISSUE 19B Calculating Initial Shareholder Basis.

Initial Basis in S Corporation Stock

Basis of Stock Acquired by Gift

Basis of Stock Acquired by Inheritance

Economic Outlay

KEY ISSUE 19C Adjusting Basis Annually.

Basis Adjustments

Increases to Basis

Nonseparately Stated Income

Separately Stated Income Items

Tax-exempt Income

Depletion (Other Than Oil and Gas)

Addition to Asset's Basis Due to General Business Credit Recapture

Decreases to Basis for Distributions

Other Decreases to Basis

Nonseparately Stated Loss

Separately Stated Items of Deduction or Loss

Charitable Contributions

Nondeductible, Noncapital Expenses

Reduction in Asset's Basis Due to General Business Credit

Oil and Gas Depletion

Section 59(e) Expenditures

Effect of Cancellation of Debt Income on Basis

Basis Cannot Be Reduced below Zero

Unused Losses Carry Over to Future Years

Unreported Income Does Not Increase Basis

Basis Is Reduced Even If Loss or Deduction Provides No Tax Benefit

Domestic Production Activities Deduction Does Not Affect Basis

Stock and Debt Basis Worksheet

KEY ISSUE 19D Ordering and Timing Rules of Shareholder Basis Adjustments.

Timing of Basis Adjustments

Sale of Shares

Order of Adjustments to Stock Basis

Election to Reduce Basis by Loss or Deduction Items before Nondeductible Expenses

Worthless Stock

Basis Adjustments Are Allocated to Each Share

KEY ISSUE 19E Adjusting Basis for Pass-through and Distributions.

Basis Is Increased by Income, Reduced by Distributions, and Reduced by Losses

Property Distributions

Corporate Liquidation

KEY ISSUE 19F Deducting Shareholder Losses to the Extent of Basis.

Losses and Deductions May Be Subject to Limitation at the Shareholder Level

Deductible Losses and Deductions Are Limited to Basis

Basis Is Increased by Pass-through Income before Losses and Deductions Are Considered

Treatment When Separate Types of Losses Exceed Basis

How Current Year's Income Is Applied against Loss Carryovers

Deduction for Charitable Contributions of Appreciated Property May Exceed Basis

Gain on Sale of S Corporation Stock Does Not Increase Basis

Domestic Production Activities Deduction Does Not Affect Basis

Effect of Credits on Basis

KEY ISSUE 19G Adjusting Basis of Inherited S Stock by Income in Respect of a Decedent.

Income in Respect of a Decedent

Income Tax Treatment of IRD

Stepped-up Basis of S Stock Is Reduced by IRD

Pass-through of IRD

KEY ISSUE 19H Adjusting Basis for Life Insurance Premiums and Proceeds.

Effect of Life Insurance Proceeds and Benefits on Basis

Alternative Minimum Tax

KEY ISSUE 19I Taking Advantage of the Post-termination Transition Period.

ILLUSTRATION 19-1: Using Schedule K-1 to Determine Basis Changes

Chapter 20: Shareholder Debt Basis

Introduction

KEY ISSUE 20A Deducting Shareholder Losses against Debt Basis.

Losses Deducted against Debt Basis after Stock Basis Is Depleted

1120S Balance Sheet

Repaid Debt

Pass-through Income Increases Previously Reduced Debt Basis

Debt Basis Is Increased by "Net Increase"

Debt Basis Is Not Increased If Net Amount Is Negative

When Debt Basis Adjustments Are Effective

Adjusting Debt Basis When Debt Is Disposed of or Repaid during the Year

Open Account Debt and Shareholder Advances

Debt Basis Reduction When Shareholder Holds Multiple Debts

Adjusting Debt Basis When Shareholder Terminates Ownership

Economic Outlay Is Required to Acquire Debt Basis

Only Direct Loans from Shareholder Provide Debt Basis

Circular or Intercompany Loans Generally Do Not Provide Debt Basis

Economic Substance Doctrine

Shareholder Guarantees

Debt Basis Acquired When Payments Are Made under a Loan Guarantee

Substitution of Shareholder's Notes for Corporate Note

Obtaining Debt Basis for New Loan from Bank to Shareholder and Shareholder to Corporation

Corporation Should Not Repay Shareholder's Loan from Bank

Increasing Debt Basis to Deduct Losses

Distributions Do Not Reduce Debt Basis

Carryover Losses

Qualified Subchapter S Subsidiary

KEY ISSUE 20B Reporting the Repayment of Reduced-basis Shareholder Debt.

Repayment Can Result in Gain to Shareholder

Contributing Note to Capital

Repayment of Shareholder Loans

Tax Character of Gain from Repayment of Loan

Partial Repayment of Loan from Shareholder

Multiple Loans

Effect of Current Year's Income on Repaid Note

Effect of Current Year's Losses on Repaid Note

Basis Increases When There Are Multiple Notes

Shareholder Can Repay Specific Loan

Open Account Debt and Shareholder Advances

Loan Repayments Are Reported on Form 1120S

Year-end Loans Can Accelerate Loss Deductions

Gain on Repayment of Reduced-basis Note Does Not Increase Basis

KEY ISSUE 20C Imputing Interest on Below-market Loans from Shareholder.

KEY ISSUE 20D Recognizing Second-class-of-stock Danger.

KEY ISSUE 20E Reporting Interest Paid on Loans from Shareholders.

Allocating Interest Expense on Loans from Shareholder

Interest Expense Paid by Accrual-basis S Corporation

KEY ISSUE 20F Adjusting Debt Basis for Simultaneous Loans Payable to and Receivable from a Shareholder.

KEY ISSUE 20G Determining Whether Funds from Shareholder Are Loans or Capital Contributions.

Debt versus Equity

IRS Can Recharacterize Debt as Equity

KEY ISSUE 20H Adjusting Debt Basis for Open Account Debt and Shareholder Advances.

Open Account Debt Is Subject to $25,000 Threshold

Effect of Treating Debt as If It Were Evidenced by a Written Instrument

Disposition of Open Account Debt or Stock during Tax Year

Debts Evidenced by Written Notes Are Treated Separately

Treatment of Open Account Debt Outstanding before October 20, 2008

ILLUSTRATION 20-1: Calculation of Basis in Stock and Debt

ILLUSTRATION 20-2: Calculation of Basis in Stock and Debt

ILLUSTRATION 20-3: Calculation of Basis in Stock and Debt When Distributions Exceed Income

Chapter 21: Distributions

Introduction

KEY ISSUE 21A Defining Distributions.

Definition

Relationship of Pass-through Income, Stock Basis, and Distributions

Definition of Dividends

Capital Gain and Dividend Tax Rates

A Distribution May Include a Dividend

KEY ISSUE 21B Determining Accumulated Earnings and Profits (AE&P) Balance.

Dividend Treatment for Distributions of AE&P

Calculation of C Corporation E&P

AE&P When C Corporation Elects S Status

Reduction of AE&P

Adjusting AE&P after S Election Is Effective

AE&P Balance Appears on Form 1120S

Determining Balance of AE&P May Be Difficult

KEY ISSUE 21C Making Distributions from S Corporations with No AE&P.

Ordering Rules When S Corporation Has No AE&P

Stock Basis Adjustments for Pass-through Items and Distributions

Distributions Not in Excess of the Shareholder's Stock Basis

Distributions in Excess of Stock Basis Are Capital Gain

How a Corporation without AE&P Reports Distributions

How a Shareholder Reports the Receipt of Distributions in Excess of Basis

Effect of Distributions When Shareholders Have Different Bases

Distributions Do Not Reduce Debt Basis

Shareholder Can Receive Tax-free Distributions to Extent of Stock Basis at the Beginning of the Year

Effect of Carryover Losses on Basis and Distributions

Effect of Negative AE&P Balance

Accumulated Adjustments Account Is Tracked on Form 1120S, Schedule M-2

KEY ISSUE 21D Making Distributions from S Corporations with AE&P.

Ordering Rules When the Corporation Has AE&P

S Corporation without AE&P Cannot Issue a Dividend

Reporting Distributions to Shareholders When the Corporation Has AE&P

Accumulated Adjustments Account (AAA)

AAA Adjustments

AAA Adjustment Order

AAA When Aggregate Adjustments Are Positive

AAA When Aggregate Adjustments Are Negative

AAA Is Reduced by Entire Loss Amount

AAA Is Calculated before Stock Basis

Nontaxable Distributions of AAA Are Limited to Stock Basis

AAA Balance Can Be below Zero

AAA Is a Corporate-level Account

Distributions That Exceed AAA and AE&P

Distributions When AAA Has Negative Balance

Adjustments When Corporation Has No AE&P and AAA Has a Negative Balance

Adjustments When Corporation Has AE&P and AAA Has a Negative Balance

Distributions When AAA Exceeds Stock Basis

Multiple Distributions during the Year That, in the Aggregate, Exceed AAA

Beginning Stock Basis or AAA Can Be Distributed Free of Tax

Basis, AAA, and Charitable Contributions

Stock Sales and Redemptions

Distributions Paid to Owner of Restricted Bank Director Stock

KEY ISSUE 21E Distributing Previously Taxed Income (PTI).

Definition

Distribution Order When PTI Is Present

Comparison of AAA and PTI

Adjusting AAA and PTI

Adjusting AAA, PTI, and AE&P

Effect of Stock Disposition on AAA and Previously Taxed Income

Effect on PTI of Transfers between Spouses in a Community Property State

PTI Cannot Be Distributed during the Post-termination Transition Period

KEY ISSUE 21F Distributing the Other Adjustments Account (OAA).

KEY ISSUE 21G Distributing Property to Shareholders.

Property Distributions

Holding Period

Distribution of Appreciated Property

Shareholder Basis in Distributed Property

Depreciation Recapture Rules Apply to Distributions of Property

Distribution of Property When Basis Exceeds Fair Market Value

Pass-through of Gain When an Appreciated Asset Is Distributed

Valuing Property Distributions

KEY ISSUE 21H Taking Advantage of the Post-termination Transition Period.

KEY ISSUE 21I Reporting and Distributing Tax-exempt Income.

Reporting Tax-exempt Income

Effect of Tax-exempt Income on Basis and AAA

Distribution of Tax-exempt Income

Effect of Tax-exempt Income on AAA, OAA, Basis, and Distributions

Effect of Cancellation of Debt Income on Basis

KEY ISSUE 21J Reporting Corporate Life Insurance Proceeds and Premiums.

KEY ISSUE 21K Maintaining the AAA Balance When There Is No AE&P.

KEY ISSUE 21L Using One of Three Elections to Distribute AE&P before AAA.

Election to Bypass AAA

Distributing AE&P before AAA and PTI Requires Two Elections

Distributing PTI before AAA Requires Election to Bypass AAA

Form 5452--Corporate Report of Nondividend Distributions

Issuing Corporate Notes to Distribute AE&P

Deemed Dividend

KEY ISSUE 21M IRS May Recharacterize Distributions as Wages.

KEY ISSUE 21N Avoiding IRS Recharacterization of Loans as Distributions.

Using Loans in Lieu of Making Taxable Distributions

KEY ISSUE 21O Making Disproportionate Distributions without Breaking the Second-class-of-stock Rules.

One-class-of-stock Rules

Disproportionate Distributions to Shareholders

KEY ISSUE 21P Reporting Distributions to Shareholders on Forms 1120S and 1099.

KEY ISSUE 21Q Distributing Property When an S Corporation Liquidates.

KEY ISSUE 21R Filing Form 5452 for Certain Distributions.

Certain S Corporations Must File Form 5452

Post-termination Transition Period

KEY ISSUE 21S Making Distributions in the Year of Stock Disposition--Effect on AAA, PTI, and AE&P.

KEY ISSUE 21T Determining the Active or Passive Nature of Distributions.

KEY ISSUE 21U Borrowing to Make Shareholder Distributions.

KEY ISSUE 21V Taxing Dividends at Favorable Rates.

Qualified Dividends Are Taxed at Maximum 15% Tax Rate

Qualified Stock Must Be Held for Specific Period

Dividends Received by S Corporation Pass through to Shareholders

Dividends Treated as Investment Income Do Not Qualify for Favorable Tax Rates

Deemed Dividend Distributions

KEY ISSUE 21W Charitable Contributions of Appreciated Property.

Passing Through Charitable Contributions of Appreciated Property

Adjusting Basis and AAA

Charitable Contribution Stock Basis Limitation Rules

Alternative Minimum Tax

Charitable Contributions of Appreciated Property Are Not Subject to Built-in Gains Tax

ILLUSTRATION 21-1: Distributions When the Corporation Has No AE&P

ILLUSTRATION 21-2: Distributions in Excess of Stock Basis

ILLUSTRATION 21-3: Distributions That Include Dividends

ILLUSTRATION 21-4: Sample Filled-in Schedule M-2 When There Is a Net Negative Adjustment

ILLUSTRATION 21-5: Distributions That Exceed AE&P

ILLUSTRATION 21-6: Reporting Distributions of AAA and PTI on Schedule M-2

ILLUSTRATION 21-7: Schedules L, M-1, and M-2 When PTI Is Reduced by a Shareholder's Departure

ILLUSTRATION 21-8: Reporting Property Distribution on Schedules L, M-1, and M-2

ILLUSTRATION 21-9: Reporting Distributions on Form 5452

Chapter 22: Property Transactions with Shareholders

Introduction

KEY ISSUE 22A Distributing Property to Shareholders.

KEY ISSUE 22B Selling Property between Related Parties.

Losses on Sales or Exchanges between Related Parties

Definition of Related Party

Sale or Exchange between Corporation and Shareholder

Gains and Losses from Related-party Transactions Are Not Offset

Disallowed Loss May Reduce Gain on Subsequent Sale

The Related-party Rules Can Affect Built-in Gains Tax

Gain on Sale to Related Party May Be Ordinary

Ordinary Income from Distribution of Appreciated Property

Installment Sales

Related-party Transactions May Be Scrutinized by IRS

KEY ISSUE 22C Corporation-shareholder Rental Transactions.

Rent at Other Than FMV May Be Reclassified

Renting Home Office Space to an S Corporation

Self-rented Property

BALANCE SHEET AND EQUITY ACCOUNTS

Chapter 23: Schedule L--The Balance Sheet

Introduction

KEY ISSUE 23A Completing Schedule L, the Balance Sheet per Books.

Certain S Corporations Are Not Required to Complete Schedule L Balance Sheet

Tying Schedule L to the Books and Records

Reporting Assets on Schedule L

Reporting Liabilities on Schedule L

Reporting Shareholder's Equity on Schedule L

KEY ISSUE 23B Completing Schedule L Balance Sheets When S Status Is Effective upon Incorporation.

Balance Sheet When Company Incorporates and Elects S Status Simultaneously

Retained Earnings When the S Corporation Was Not Previously a C Corporation

Certain S Corporations Are Not Required to Complete Schedules L and M-1

KEY ISSUE 23C Completing Schedule L Balance Sheets When C Corporation Elects S Status.

Balance Sheet Presentation When C Corporation Becomes an S Corporation

Retained Earnings When the S Corporation Was Previously a C Corporation

Accumulated Earnings and Profits

KEY ISSUE 23D Completing Schedule L Balance Sheets in Year of Termination.

Balance Sheet Presentation on Final S Corporation Return

Initial C Corporation Return, Form 1120

Post-termination Transition Period

Effect of S Election Termination on AE&P and Stock Basis

Balance Sheet Presentation in Year of Liquidation

KEY ISSUE 23E Maintaining Schedule L Balance Sheet Equity Accounts.

KEY ISSUE 23F Watching for Red Flags on the Balance Sheets.

Excess Cash or Investments

Distributing AE&P after Year-end

Tax-exempt Securities

Loans to Shareholders

Excess Net Passive Income

Loans from Shareholders

Second Class of Stock

Analyzing Balance Sheet Items

ILLUSTRATION 23-1: Schedule L (Form 1120S) When a Company Incorporates and Simultaneously Becomes an S Corporation

ILLUSTRATION 23-2: Schedule L (Form 1120S) When There Are Differences in Book and Tax Income

ILLUSTRATION 23-3: Schedule L (Form 1120S) on the Final S Corporation Return

Chapter 24: Schedules M-1 and M-3

Introduction

KEY ISSUE 24A Identifying Items Used in Determining Income per the Tax Return.

Schedule M-1

Permanent Differences

Timing Differences

Schedule M-3

Uncertain Tax Positions

KEY ISSUE 24B Reconciling Income Included on Schedule K but Not Recorded on Books.

KEY ISSUE 24C Reconciling Expenses Recorded on Books but Not Included in Income per the Tax Return.

KEY ISSUE 24D Reconciling Income Recorded on Books but Not Included in Income per the Tax Return.

KEY ISSUE 24E Reconciling Deductions Included on Schedule K but Not Charged against Book Income.

KEY ISSUE 24F Completing Schedule M-1.

Book and Tax Reconciliation

Certain S Corporations Are Not Required to Complete Schedules L and M-1

KEY ISSUE 24G Preparing Schedule M-3.

When to File Schedule M-3

Guidance on IRS Website

Reportable Entity Partner

Schedule M-3 Preparation Details in a Nutshell

Book versus Tax Assets

Preparing Part I--Financial Information and Net Income (Loss) Reconciliation

QSub Is Not Separately Reported

Preparing Part II--Reconciliation of Net Income (Loss) per Income Statement of S Corporation with Income (Loss) per Return

Preparing Part III--Reconciliation of Net Income (Loss) per Income Statement of S Corporation with Income (Loss) per Return--Expense/Deduction Items

Items Must Be Separately Stated and Adequately Disclosed

Reconciling Cost of Goods Sold, Interest Income, and Interest Expense

Comparing Schedules M-1 and M-3

Disclosing Reportable Transactions

ILLUSTRATION 24-1: Reporting Book-tax Differences on Schedule M-1

ILLUSTRATION 24-2: Tracking M-1 Adjustments (Book-tax Differences)

ILLUSTRATION 24-3: Reporting Book-tax Differences on Schedule M-3

Chapter 25: Schedule M-2

Introduction

KEY ISSUE 25A Making Tax-free Distributions to the Extent of the Accumulated Adjustments Account.

AAA Is Adjusted Annually

AAA and Retained Earnings Balances May Not Agree

Annual Adjustments to AAA

AAA Balance Can Be Less Than Zero

Effect of AE&P

Maintaining the AAA Balance When There Is No AE&P

KEY ISSUE 25B Determining the Effect of Distributions on Stockholders' Equity Accounts.

Distributions Reduce AAA and Other Equity Accounts

Distributions Reduce Retained Earnings

KEY ISSUE 25C Determining the Effect of the Other Adjustments Account on Distributions and Schedule M-2.

KEY ISSUE 25D Making Tax-free Distributions to the Extent of Previously Taxed Income.

KEY ISSUE 25E Accounting for Life Insurance Premiums.

KEY ISSUE 25F Entering Pass-through Items Affecting Basis on Schedule M-2.

Preparing Schedules K, M-1, and M-2

Comprehensive Example

ILLUSTRATION 25-1: Calculation of AAA Balance on Schedule M-2

ILLUSTRATION 25-2: Calculation of Negative AAA Balance on Schedule M-2

ILLUSTRATION 25-3: Calculation of OAA Balance

ILLUSTRATION 25-4: Reporting Distributions of OAA on Schedule M-2

ILLUSTRATION 25-5: Book/Tax Reconciliation on Schedules K and M-1

ILLUSTRATION 25-6: Preparing Schedule M-2, a Comprehensive Example

ILLUSTRATION 25-7: Calculations of Stock Basis, AAA, OAA, PTI, Retained Earnings, and AE&P

PASS-THROUGH TO SHAREHOLDERS

Chapter 26: Schedules K and K-1--Pass-through

Introduction

KEY ISSUE 26A Nonseparately Stated Income or Loss and Separately Stated Items.

Two Categories of Pass-through Items

Nonseparately Stated Income or Loss

Separately Stated Items

Reporting Pass-through Items

Cancellation of Debt Income

Pass-through Income Is Generally Considered Received Evenly throughout Tax Year

Reporting Income and Deductions on Schedule K-1

KEY ISSUE 26B Reporting Results of Operations.

When Pass-through Is Reported by the Shareholder

Passing through the Domestic Production Activities Deduction

Pass-through to an S Corporation Partner

Reporting Multiple Activities on Schedule K-1

S Corporation's Treatment of Self-employment Income Passed Through by Partnership

Applying Basis Limitations to Losses Passed Through by Partnership

KEY ISSUE 26C Allocating Pass-through to Shareholders.

Pass-through Items Are Generally Allocated on a Per-share, Per-day Basis

Election to Use Specific Accounting upon Complete Disposition of a Shareholder's Stock

Election to Use Specific Accounting upon a Qualifying Disposition of Stock

Decision on Allocation Methods Can Be Deferred Beyond Year-end

Multiple Ownership Changes

Pass-through on the Day the Shares Are Transferred

Death of a Shareholder

Pass-through of Life Insurance Proceeds

Worthless Stock

Effect of Bankruptcy on S Election

Stock Transfer Worksheet

KEY ISSUE 26D Allocating Income and Losses in the S Termination Year.

S Termination Year

Allocation of Pass-through Items

C Corporation Short Year Income Must Be Annualized

Election to Use Specific Accounting for Each Short Year

Specific Accounting Method Is Mandatory under Certain Circumstances

Pass-through to Shareholders in Year the S Election Terminates

KEY ISSUE 26E Passing through Corporate-level Tax to Shareholders.

Built-in Gains Tax

Tax on Excess Net Passive Income

Recapture of Business Credits

KEY ISSUE 26F Reporting Self-charged Interest.

KEY ISSUE 26G Disclosing Inconsistent Treatment on Shareholder's Return.

KEY ISSUE 26H Deducting Corporate Expenses Paid by Shareholder.

Interest Incurred by Shareholder to Purchase Stock or Inject Capital into an S Corporation

KEY ISSUE 26I Limitations on Losses and Deductions.

Bankruptcy Trustee Could Not Force S Shareholders to Return Refunds Due to Pass-through Losses

KEY ISSUE 26J Considering Beneficial Owner to Be an S Corporation Shareholder.

Beneficial Owner of S Stock Is Considered to Be Shareholder

Effect When No Shares Are Issued

Shares Held by Spouse as Community Property

Restricted Stock

Eligible S Corporation Trusts

ILLUSTRATION 26-1: Reporting Nonseparately Stated Income and Separately Stated Items

ILLUSTRATION 26-2: By-activity Information Worksheet

ILLUSTRATION 26-3: Election to Apply Specific Accounting Rules in Connection with the Termination of a Shareholder's Entire Interest

ILLUSTRATION 26-4: Election to Apply Specific Accounting Rules in Connection with a Qualifying Stock Disposition

ILLUSTRATION 26-5: Election to Determine Short-period Income Based on Specific Accounting

Chapter 27: Alternative Minimum Tax

Introduction

KEY ISSUE 27A AMT Applies at the Shareholder Level.

KEY ISSUE 27B S Corporations Are Not Subject to AMT.

Small Corporation Exemption Does Not Apply to S Corporations

AMT Exemption

KEY ISSUE 27C Applying AMT Rules to Depreciation Adjustments and Preferences.

Depreciation of Property Placed in Service after 1986

Regular Tax and AMT Depreciation Recovery Periods--Property Placed in Service after 1998

Elections to Eliminate AMT Depreciation Adjustments

Property Subject to the Bonus Depreciation Deduction

KEY ISSUE 27D Making Corporate and Shareholder Elections to Minimize AMT.

Shareholder's Section 59(e) Election Can Eliminate Certain AMT Adjustments and Preferences

Treatment of Qualified Expenditures at the S Corporation Level

Section 59(e) Election to Amortize Qualified Expenditures Is Made at the Shareholder Level

Circulation Expenditures

Research and Experimental Expenditures

Intangible Drilling Costs

Mining Exploration and Development Costs

Disposition of Property Subject to the Section 59(e) Election

Effect of the Section 59(e) Election on Stock Basis

Claiming the Minimum Tax Credit

KEY ISSUE 27E Reporting Adjustments and Preferences from Passive Activities.

Passive Activities

Reporting Adjustments and Preferences from Passive Activities

Disposition of a Passive Interest

KEY ISSUE 27F Calculating Shareholder's Basis for Regular Tax and AMT Purposes.

Alternative Minimum Tax Basis Adjustments

AAA and AE&P Adjustments

KEY ISSUE 27G Applying Noncorporate AMT Rates for Long-term Capital Gains.

Gain on Collectibles

Section 1202 Small Business Corporation Stock

KEY ISSUE 27H Effect of AMT on Business Credits.

ILLUSTRATION 27-1: Reporting AMT Depreciation and Gain (Loss) Adjustments

ILLUSTRATION 27-2: Reporting Circulation Expenses

ILLUSTRATION 27-3: Reporting R&D Expenses from Passive Activity

Chapter 28: Business Credits

Introduction

KEY ISSUE 28A Identifying the Credits Composing the General Business Credit.

General Business Credit Is Made up of Different Credits

Commonly Encountered General Business Credits

Shareholder Generally Claims Credits on Form 3800

KEY ISSUE 28B Limitations on General Business Credits.

Specified Credits Offset AMT

Carryback and Carryover of Unused General Business Credits

Eligible Small Business Credits Originating in 2010

Stock Basis

Passive Activity Credits

Suspended Passive Activity Credits

KEY ISSUE 28C Recapture of General Business Credits.

Investment Tax Credit

Effects of Corporate-level Recapture

Credit Recapture Caused by Reduction in Stock Ownership

Recapture of Low-income Housing Credit

KEY ISSUE 28D Understanding the Effect of Credits on Stock Basis.

Pass-through Credits Are Not Limited to Basis

Effect of Credits That Reduce Operating Expenses

KEY ISSUE 28E Credits Relating to Rental Real Estate.

Low-income Housing Credit

Rehabilitation Credit

KEY ISSUE 28F Alternative Motor Vehicle Credit and New Qualified Plug-in Electric Drive Motor Vehicle Credit.

Alternative Motor Vehicle Credit

New Qualified Plug-in Electric Drive Motor Vehicle Credit

KEY ISSUE 28G Claiming the Disabled Access Credit.

Qualifying for the Disabled Access Credit

Disabled Access Credit and Expenditures for Removal of Barriers

Disabled Access Expenditures May Be Required to Address a Particular Concern of the Disabled

Web Access Expenses Are Not Eligible for Disabled Access Credit

KEY ISSUE 28H Claiming the Employer Social Security Credit.

Employer Social Security Credit Can Offset AMT

KEY ISSUE 28I Claiming the Credit for Small Employer Pension Plan Startup Costs.

KEY ISSUE 28J Claiming the Credit for Federal Tax on Fuels.

KEY ISSUE 28K Small Employer Health Insurance Credit.

Eligible Small Employer

Amount of the Credit

Calculating the Credit

Reporting the Credit

KEY ISSUE 28L Temporary Tax Credit for Retaining Qualified New Employees.

ILLUSTRATION 28-1: Partnership Reporting Pass-through of Credit to S Corporation

ILLUSTRATION 28-2: S Corporation Reporting Pass-through of Credit to Shareholder

ILLUSTRATION 28-3: Attachment to Form 1120S Reporting Credit Passed through from Partnership

ILLUSTRATION 28-4: Passive Activity Limitation to Low-income Housing Credit

ILLUSTRATION 28-5: Reporting Low-income Housing Credit as a Component of General Business Credit

ILLUSTRATION 28-6: S Corporation Reporting Qualified Rehabilitation Expenditures

ILLUSTRATION 28-7: Schedule K-1 Reporting Qualified Rehabilitation Expenditures to Shareholder

ILLUSTRATION 28-8: Shareholder Reporting Qualified Expenditures from Passive Activity

ILLUSTRATION 28-9: Special Allowance for Rehabilitation Credit

ILLUSTRATION 28-10: Credit for Small Employer Health Insurance Premiums

ILLUSTRATION 28-11: New Hire Retention Credit

Chapter 29: Foreign Taxes

Introduction

KEY ISSUE 29A Paying or Incurring Foreign Taxes.

Overall Accounting Method

Cash Basis S Corporations

Accrual Basis S Corporations

KEY ISSUE 29B Passing Foreign Taxes through to Shareholders.

Substantiation Requirements

Categories of Foreign Source Income

KEY ISSUE 29C Sourcing Gain on the Sale of S Corporation Stock.

KEY ISSUE 29D Reporting Foreign Operations of S Corporations.

Schedule N (Form 1120)

Form 8858

Form 8865

Form 5471

Form 3520

Form 8873

Form TD F 90-22.1

Foreign Account Tax Compliance Act (FATCA)

ILLUSTRATION 29-1: Reporting Foreign Tax Information to Shareholders

ILLUSTRATION 29-2: S Corporation's Foreign Taxes Deducted by Shareholder

SHAREHOLDER LOSSES

Chapter 30: Shareholder Losses: Basis Limitations

Introduction

KEY ISSUE 30A Limiting Losses at the Shareholder Level.

Loss and Deduction Items Are Passed Through to Shareholders

Properly Calculating Basis Is a Challenge

Net Operating Losses Apply at Shareholder Level

KEY ISSUE 30B Repaying Reduced-basis Shareholder Debt.

KEY ISSUE 30C Reporting Current and Carryover Losses on Form 1040.

KEY ISSUE 30D Carrying Unused Losses to Subsequent Years.

Unused Losses Carry over Indefinitely

Carryover Losses Can Be Deducted When the Corporation Has Income

Carryover Losses Can Be Deducted When the Shareholder Increases Basis

Shareholder's Unused Losses upon Disposition of Stock

Applying Current and Carryover Losses against Basis When Stock Is Sold

Gain on Stock Sale Does Not Increase Stock or Debt Basis

Carryover Losses When a Portion of Stock Is Transferred

Effect of Stock Disposition When Loss Carryovers Are Applied against Debt Basis

Carryover Losses When Stock Is Transferred to a Spouse or Former Spouse

Midyear or Partial Stock Transfers

Carryover Losses When Stock Is Transferred by Gift

Carryover Losses When Shareholder Dies

Carryover Losses after Termination of S Status

Practice Aids

KEY ISSUE 30E Using the Post-termination Transition Period to Deduct Losses.

ILLUSTRATION 30-1: Using Carryover Losses against Current Income

Chapter 31: Passive Activity Loss

Introduction

KEY ISSUE 31A Defining, Grouping, and Separating Activities.

Passive Activity Loss Restrictions

Unused Passive Activity Losses Carry Forward

Passive Activity Losses Are Limited at Shareholder Level

Passive Activity Loss Rules Only Affect Deductibility of Losses

Definition of Activity

Certain Rental Income Is Not Passive

Facts and Circumstances Test for Determining Whether Activities Should Be Separate or Aggregated

Grouping Activities of S Corporations and Shareholders

Reporting Separate Activities on Form 1120S and Schedule K-1

Election to Aggregate Business or Rental Activities

Activity Groupings Must Remain Consistent

Pros and Cons of Combining and Separating Business Activities

Rental Activities

Grouping Rental and Business Activities

Restricting the Grouping of Certain Activities by Limited Partners

KEY ISSUE 31B Identifying the Passive or Nonpassive Nature of Pass-through.

Nonseparately Stated Income

Separately Stated Items

Material Participation Is Determined at Shareholder Level

Separate Activities Should Be Identified on Tax Return

KEY ISSUE 31C Materially Participating in an S Corporation's Activities.

Material Participation

Measuring Material Participation of Estates and Trusts

Changing Level of Participation from Not Material to Material--Activity Was Formerly Passive

Oil and Gas Working Interest

Recharacterization of Income--Significant Participation Activities

KEY ISSUE 31D Reporting Rental Income or Loss for Passive Activity Purposes.

Rental Income or Loss Is Generally Passive

Special Rules Apply to Real Estate Professionals

Combining or Separating Rental Activities

Grouping Activities of S Corporations and Shareholders

Election to Aggregate Rental Activities

Certain Rental Income Is Not Passive

Reporting Rental Real Estate Activities

$25,000 Rental Real Estate Allowance

Casualty Losses

Self-rented Property and Other Rental Income Recharacterized as Nonpassive

Passive Activity Loss Relief for Real Estate Professionals

KEY ISSUE 31E Combining or Separating Activities When There Are Rental and Nonrental Activities.

Rental and Nonrental Activities Can Be Combined under Certain Circumstances

Combining Rental Activity and Business Activity When the Activities Are Commonly Owned

Rental of Real and Personal Property

KEY ISSUE 31F Identifying Portfolio Income.

Definition of Portfolio Income

Reporting Portfolio Income and Expenses on Form 1120S, Schedules K and K-1

Self-charged Interest

Income Received from S Corporation May Be Portfolio Income

KEY ISSUE 31G Treating Covenant Not to Compete as Passive Activity.

KEY ISSUE 31H Reporting Interest Expense under the Passive Activity Rules.

Interest Incurred to Carry a Passive Activity

Use of Loan Proceeds Affects Interest Expense Classification

Self-charged Interest

Self-charged Rules Apply Only to Interest

Election Out of the Self-charged Interest Rules

KEY ISSUE 31I Determining the Passive or Nonpassive Nature of Gain on Disposition of Property.

Disposition of Property

Disposition of S Corporation Stock

KEY ISSUE 31J Determining the Passive or Nonpassive Nature of Distributions.

Distributions

Distributions in Excess of Shareholder's Stock Basis

Passive or Nonpassive Nature of Distributions

Capital Gains Distributions May Offset Both Suspended Passive and Capital Losses

Distributions of Accumulated Earnings and Profits

KEY ISSUE 31K Deducting Suspended Passive Activity Losses.

Unused Passive Losses

Suspended Passive Losses Are Deductible upon Disposition of Passive Activity

Disposition of S Stock

Disposition of Substantially All of an Activity

Disposition of an Activity by an S Corporation

Interaction of At-risk Limits with Basis Limits and Passive Activity Loss Limits

Capital Loss Limitation

Capital Gain from Disposition of Passive Activity

Installment Sale of a Passive Activity

Transfers by Gift

Transfers to a Related Party

Decedent's Final Return

Allocating Gains and Losses upon Disposition of S Stock

Distributions to Shareholders

KEY ISSUE 31L Carrying Over Suspended Passive Activity Losses in Nonrecognition of Gain Transfers.

KEY ISSUE 31M Carrying Over Suspended Passive Activity Losses upon Electing S Status.

KEY ISSUE 31N Carrying Over or Deducting Suspended Passive Activity Losses upon Terminating S Status.

KEY ISSUE 31O Carrying Over Suspended Passive Activity Credits after Disposition of an Activity.

KEY ISSUE 31P Illustrating the Passive Activities Rules with a Comprehensive Example.

ILLUSTRATION 31-1: Election to Group Activities

ILLUSTRATION 31-2: Using Suspended Loss Against Current Nonpassive Income

ILLUSTRATION 31-3: Reporting Income and Expenses from Rental Real Estate

ILLUSTRATION 31-4: Reporting Interest Expense Allocable to Purchase of S Corporation Stock

ILLUSTRATION 31-5: Using Passive Losses upon Disposition of an Activity

Chapter 32: Shareholder Losses: At-risk Limitations

Introduction

KEY ISSUE 32A Understanding the Interaction of At-risk Limits with Basis Limits and Passive Activity Loss Limits.

KEY ISSUE 32B Activities Subject to the At-risk Rules.

Original Five Activities

Extension to Trade or Business Activities

Activities Currently Subject to the At-risk Rules

KEY ISSUE 32C Determining the Amount at Risk at the Shareholder Level.

Contributing Money or Property to the S Corporation

At-risk Rules Scrutinize the Source of Funds

Guarantying Corporate-level Debt

Financing with Recourse and Nonrecourse Debt

Amounts Borrowed from a Person with an Interest in the Activity

Qualified Nonrecourse Financing

KEY ISSUE 32D Applying the At-risk Limits to the S Corporation's Activities.

Separate Computations May Be Required for Each Activity

Active Participation for At-risk Purposes

Combining Activities into One Activity

KEY ISSUE 32E Adjusting At-risk Basis for S Corporation Operations.

Adjusting At-risk Basis for Current Year's Operations

Allocating At-risk Basis to Losses and Deductions

Records and Reporting

KEY ISSUE 32F Carrying over Losses Limited by At-risk Rules.

KEY ISSUE 32G Recapturing Negative Amounts at Risk.

ILLUSTRATION 32-1: Calculating Amounts at Risk on Form 6198

CORPORATE TAXATION

Chapter 33: Built-in Gains Tax

Introduction

KEY ISSUE 33A Identifying Corporations Subject to the Built-in Gains Tax and Summarizing Built-in Gains Rules.

Background and Summary of Built-in Gains Rules

S Corporations Not Subject to the Built-in Gains Tax

Corporations Affected by the Built-in Gains Tax

Transferred Basis Property

Built-in Gains Rules Do Not Apply When a Corporation Is in C Status

Built-in Gains Tax Suspended during 2009, 2010, and 2011 for Certain S Corporations

Planning Strategies

KEY ISSUE 33B Recognizing Built-in Gains.

Built-in Gains Are Triggered by Asset Dispositions

Built-in Gain Applies to Assets on Hand When S Status Is Elected

10-Year Recognition Period

Determining Built-in Gain or Loss upon Disposition of an Asset

Net Recognized Built-in Gain

Limitations on Taxation of Built-in Gains

Substantiating Value

Net Unrealized Built-in Gain (The Overall Limit)

Net Unrealized Built-in Loss

Recognition Period

Cash-basis Receivables

Inventory

Built-in Losses

Built-in Losses Reduce Net Unrealized Built-in Gain

Accrued Bonuses to Shareholder-employees

Contribution of Built-in Loss Assets

Separate Recognition Periods for Transferred Basis Assets

Separate Computation for Transferred Basis Assets

Exchanged Basis Property

Section 481(a) Adjustments

Completed Contract Method

Installment Sales

Discharge of Indebtedness Income and Bad Debt Deductions

Partnership Interests

Duplication of Built-in Gain Prevented on C to S Conversion

Built-in Gains Tax Suspended during 2009, 2010, and 2011 for Certain S Corporations

KEY ISSUE 33C Applying the Current Recognition Limit, Taxable Income Limit, and Net Unrealized Built-in Gain (Overall Limit) to Built-in Gains.

Current Recognition Limit

Net Unrealized Built-in Gain (the Overall Limit)

Taxable Income Limit

Carryover Rule

Taxable Income Limitation in Year the Recognition Period Expires

Built-in Gains Tax Suspended during 2009, 2010, and 2011 for Certain S Corporations

KEY ISSUE 33D Calculating and Reporting the Built-in Gains Tax.

Tax Rate

Computing the Built-in Gains Tax

Tentative Built-in Gains Tax

C Corporation Carryovers Reduce Built-in Gains Tax

Limitation on S Corporation's Use of C Corporation General Business Credit

Limitation on S Corporation's Use of C Corporation Minimum Tax Credit

Special Fuels Credit

Estimated Tax Payments

Built-in Gains Tax Suspended during 2009, 2010, and 2011 for Certain S Corporations

KEY ISSUE 33E Passing the Deduction for Built-in Gains Tax through to Shareholders.

Deducting Built-in Gains Tax from S Corporation Income

Matching Problems When Tax Is Limited by Taxable Income

KEY ISSUE 33F Valuing Goodwill and Intangibles.

Appraisals of Goodwill and Intangibles Should Be Completed

Goodwill or Intangibles Owned by Shareholders Do Not Generate Built-in Gain

Watch for Goodwill and Intangibles

Premium Received for Partnership Interest Was Not Subject to Built-in Gains Tax

KEY ISSUE 33G Valuing Date-of-conversion Inventory for Built-in Gains Tax Purposes.

Built-in Gains Rules Apply to Inventory

Method of Valuing Inventory Items

Work in Progress

When Does a Disposition of Inventory Owned on the Date of Conversion Occur?

Are Natural Resources Exempt from the Built-in Gains Tax?

KEY ISSUE 33H Applying Built-in Gains Rules to Installment Sales.

Installment Note Executed during C Corporation Period

Installment Sale Benefits Are Restricted for Built-in Gains Purposes

No Built-in Gain Recognition until Payments Are Received

Effective Date and Examples

Installment Sales Subject to the Special Installment Sale Rules

Built-in Gains Tax Suspended during 2009, 2010, and 2011 for Certain S Corporations

KEY ISSUE 33I Distributing Property to Shareholders.

Property Distributions May Result in Built-in Gains Tax

KEY ISSUE 33J Applying the Built-in Gains Rules to Qualified Subchapter S Subsidiaries.

Qualified Subchapter S Subsidiary

Avoiding Potential Duplicate Built-in Gains Tax Liability for Parent S Corporations

KEY ISSUE 33K Accrued Bonuses Can Reduce Net Unrealized Built-in Gain.

Bonuses

KEY ISSUE 33L Charitable Contributions of Appreciated Property Are Not Subject to Built-in Gains Tax.

KEY ISSUE 33M Reporting Built-in Gains during the 2009-2010 and 2011 Built-in Gains Tax Suspension Periods.

Built-in Gains Tax Suspended for Certain S Corporations in 2009, 2010, and 2011

Qualifying for the 2011 Built-in Gains Suspension Period

Built-in Gains Suspension When Recognition Period Began in 2002

Built-in Gains Tax Suspension Periods Expire after 2011

Applying the 2011 Built-in Gains Tax Suspension Period to Transferred Basis Property

Calculating Net Recognized Built-in Gain and Net Unrealized Built-in Gain

Reporting Built-in Gains Recognized during Suspension Period

Carryover of Built-in Gains

Installment Sale Income during Built-in Gains Suspension Periods

ILLUSTRATION 33-1: Built-in Gains Tax Worksheet (for 2011 Tax Year)

ILLUSTRATION 33-2: Calculating and Reporting the Built-in Gains Tax

Chapter 34: Tax on Excess Net Passive Income

Introduction

KEY ISSUE 34A Identifying Corporations Subject to the Excess Net Passive Income Tax.

Requirements

Tax Rate

Passive Investment Income Can Cause Termination of S Status

Accumulated Earnings and Profits

Distribute AE&P to Eliminate Exposure to Tax

Passive Investment Income

Income Derived in the Course of a Trade or Business Is Not Passive

Active Rental Trade or Business

Interest Income

Tax-exempt Interest Income

Dividends Received from a Subsidiary Corporation

S Corporation Banks

KEY ISSUE 34B Computing the Tax on Excess Net Passive Income.

Gross Receipts

Passive Investment Income

Net Passive Income

Excess Net Passive Income

Taxable Income Limitation

Tax Rate and Tax Credits

Tax-exempt Interest Income

How Tax Is Reported

Estimated Tax Payments

KEY ISSUE 34C Passing Excess Net Passive Income Tax through to Shareholders.

KEY ISSUE 34D Coordinating the Tax on Passive Investment Income with the Built-in Gains Tax.

KEY ISSUE 34E Waiving the Tax on Excess Net Passive Income.

ILLUSTRATION 34-1: Worksheet for Computing the Tax on Excess Net Passive Income

ILLUSTRATION 34-2: Filled-in Schedule K-1 (Form 1120S) Reporting Passive Investment Income Items

Chapter 35: Other Tax Payments

Introduction

KEY ISSUE 35A Making Estimated Tax Payments at the S Corporation Level.

Estimated Tax Payments

Required Annual Payment

Estimated Tax Payments Based on the Previous Year's Excess Net Passive Income Tax

Built-in Gain and Business Credit Recapture Cannot Be Based on Last Year's Tax

Four Equal Installment Payments

Due Dates for Payment of Estimated Tax

Four Variable Installment Payments

Using the Adjusted Seasonal Method

Using the Annualized Income Method

Reporting Estimated Tax Payments

Quick Refunds

Short Tax Years

KEY ISSUE 35B Calculating LIFO Recapture.

LIFO Inventory on Date S Election Becomes Effective

LIFO Recapture When an S Corporation Acquires Inventory from a C Corporation

Inventory Adjustment

LIFO Recapture Amount

LIFO Recapture Tax

Transfers of LIFO Inventory

Failure to Make Timely LIFO Recapture Installment Payments

LIFO Recapture Does Not Terminate LIFO Method

Reporting Inventory on Tax Return Balance Sheets and Financial Statements

KEY ISSUE 35C Making Required Payments for Fiscal Year Elections.

KEY ISSUE 35D Recapturing Business Credits.

KEY ISSUE 35E Remitting S Corporation Taxes.

Enrollment in Electronic Federal Tax Payment System

Payment by Electronic Funds Transfer Is Required

Penalty for Failure to Deposit Electronically

Transitional Relief When Payment Is Due on a Holiday

KEY ISSUE 35F Avoiding the Estimated Tax Underpayment Penalty for S Corporation Shareholders.

S Corporation Shareholders

Annualization Method

Original Return Establishes Estimated Tax Requirements

KEY ISSUE 35G Penalty for Failure to Pay.

ILLUSTRATION 35-1: Reporting the LIFO Recapture Tax on the Final C Corporation Return

ILLUSTRATION 35-2: Attachment to Form 1120, Schedule J, Showing the Computation of the LIFO Recapture Tax

S TERMINATIONS AND CHANGES IN STOCK OWNERSHIP

Chapter 36: Termination of S Status

Introduction

KEY ISSUE 36A Voluntarily Revoking the S Election.

Termination by Revocation

Revocation Is Made in Statement Form

Statement of Shareholder Consent to Revocation

Effective Date of Revocation

S Election May Be Revoked before It Becomes Effective

Checkbox on Form 1120S Is Used to Report Revocation of S Election

Filing the Revocation When an LLC Revokes S Status

Bankruptcy Trustee May Have Power to Avoid S Revocation

Rescission of a Revocation

KEY ISSUE 36B Inadvertently Terminating the S Election because of Failure to Qualify as an S Corporation.

Events That Terminate S Status

Termination Due to Second Class of Stock

Effective Date of Termination

Disqualifying Event May Be Voluntary or Involuntary

Notification to IRS of S Termination

Waiver of Inadvertent Termination

Pass-through When IRS Waives Termination of the S Election

Examples of Inadvertent Termination Waivers

Relief from Missed QSST or ESBT Election

Relief from Corporation Dissolution under State Law

Summary of Procedures for Filing a Letter Ruling

KEY ISSUE 36C Involuntarily Terminating the S Election because of Excess Passive Investment Income.

Passive Investment Income Test

AE&P

Passive Investment Income

Gross Receipts

Termination of the S Election Can Be Avoided by Distributing AE&P

Requesting Waiver of Termination because of Excess Net Passive Income

KEY ISSUE 36D Passing-through Income and Losses in the S Termination Year.

S Termination Year

Allocation of Pass-through Items

KEY ISSUE 36E Filing Short-year Returns for S Termination Year.

Pass-through in Short S Year

Due Date for S and C Short-year Returns

Obtaining an Extension to File Both Short-period Returns

Annualizing C Short-year Income

Counting Years for Carryover Purposes

Checkbox on Form 1120S to Report S Election Termination or Revocation

Balance Sheet Presentation on Form 1120S in Year S Election Terminates

Accounting for AAA and AE&P following Termination of S Status

KEY ISSUE 36F Taking Advantage of the Post-termination Transition Period.

Purpose of Post-termination Transition Period

Definition of Post-termination Transition Period

Distributions of AAA during the Post-termination Transition Period

Election to Distribute AE&P before AAA

Balance Sheet Presentation during Post-termination Transition Period

Using the Post-termination Transition Period to Deduct Losses

Losses Limited by At-risk Basis

KEY ISSUE 36G Reelecting S Status after Termination.

Five-year Reelection Rule

Five-year Waiting Period Applies to QSub Terminations

Exceptions to the Five-year Rule

Five-year Reelection Rule Applies to a Successor Corporation

Carryover Losses after Termination of S Status

Carryover of S Corporation Attributes after Termination

KEY ISSUE 36H Meeting the Estimated Tax Requirements following Termination.

Estimated Tax Payment Requirements

Basing C Corporation Estimated Tax on 100% of Prior Year's Tax

C Corporation Can Base Its Estimate Payments on the Prior S Year's Tax under Certain Circumstances

Estimated Tax Payments When the Prior Year's Tax Exception Does Not Apply

No Estimated Tax Payments Required for Short Tax Year Less Than Four Months

ILLUSTRATION 36-1: Statement of Revocation of S Election

ILLUSTRATION 36-2: Statement of Rescission of Revocation of S Election

ILLUSTRATION 36-3: IRS Notification of Termination of S Status

Chapter 37: Stock Dispositions

Introduction

KEY ISSUE 37A Determining Tax Consequences of Sale of S Stock.

Basis and Gain or Loss

Capital Gain

Other Considerations

Collectibles Gain

Allocating Pass-through upon Complete Disposition of Stock

Planning Strategies

KEY ISSUE 37B Determining Effect of Various Limitations on Unused Losses.

Unused Losses

Interaction of Basis, At-risk, and Passive Activity Loss Limitations

KEY ISSUE 37C Calculating the Effect of Stock Sale on AAA and PTI.

Shareholder's Equity Accounts

KEY ISSUE 37D Determining Basis When Stock Is Disposed of by Gift.

KEY ISSUE 37E Determining the Effects of Stock Transfer upon the Death of a Shareholder.

Death of Shareholder

Eligible Shareholders

Allocating Pass-through in Year of Death

Basis of Decedent's Stock

Carryover Losses of the Decedent

Suspended Passive Activity Losses of the Decedent

Planning Strategies

KEY ISSUE 37F Deducting Ordinary Loss on Disposition of Section 1244 Stock.

Background

Worthless Stock

Pass-through Is Applied before Worthless Stock Loss

Section 1244 Stock Loss

Annual Section 1244 Deduction Limitation

Multiple Gains and Losses from Section 1244 Stock

Section 1244 Loss Applies Only to Stock Acquired from the Corporation

Section 1244 Stock Loss Can Apply to Multiple Purchases of Stock

An S Corporation Cannot Own Section 1244 Stock

Section 1244 Stock Must Be Issued in Exchange for Money or Property

Stock Acquired in Exchange for Debt

Shareholder Treatment of NOL Created by a Section 1244 Stock Loss

Conversion of LLC to S Corporation

Reporting, Recordkeeping, and Disclosure Requirements

Shareholder Reporting

Shareholder Recordkeeping

Corporate Reporting

Corporate Recordkeeping

Transitional Year

Pitfalls to Avoid in Qualifying Stock under IRC Sec. 1244

Gross Receipts Test in Year of Loss

Checklist

KEY ISSUE 37G Recapturing Business Credit upon Disposition of Stock.

Chapter 38: Changes in Corporate Capital Structure

Introduction

KEY ISSUE 38A Election and Reporting Issues for Qualified Subchapter S Subsidiaries.

QSubs

QSub Election

Deemed Liquidation of an Existing Subsidiary

Tiered Subsidiaries

Built-in Gains Tax

LIFO Recapture Tax

Effect of the QSub Election

Employment Taxes

QSubs Treated Separately for Certain Tax Liabilities

Excise Taxes

Information Returns

Special Rules for Banks Apply Separately

Special Rules for EINs in Type F Reorganizations

Debt of the QSub

Organizational Expenditures of the QSub

Start-up Expenses

Success-based Fees

Affiliated C Corporation Subsidiaries Can Join in Filing a Consolidated Return

KEY ISSUE 38B Termination of QSub Status.

Failure to Meet QSub Requirements

Termination Resulting from a Sale of a Portion of the QSub Stock

Notifying the IRS

KEY ISSUE 38C Relief from Inadvertently Invalid QSub Elections and Terminations.

Relief for Late QSub Election When Form 1120S Has Not Been Filed

Relief for Late QSub Election When Form 1120S Has Been Filed

Relief for a Late QSub Election by the Transferee Parent S Corporation

Relief for Late QSub Election When Rev. Proc. 2003-43 or 2004-49 Is Not Available

User Fees

KEY ISSUE 38D Reporting Redemptions of S Corporation Stock.

Redemption Transactions

Corporate Recognition of Gain or Loss

Allocation of S Corporation Income

Effect on Stockholder's Equity Accounts

Return Preparation Issues

Tax Consequences to a Redeemed Shareholder

Constructive Stock Ownership Rules

KEY ISSUE 38E Reviewing Reorganizations and Recapitalizations.

Tax-free Combinations, Divisions, and Recapitalizations

KEY ISSUE 38F Liquidating an S Corporation.

Complete Liquidation of a Corporation

Corporate Recognition of Gain or Loss

Computation and Character of Gain or Loss

Partial Liquidation

Pass-through Items in the Year of Liquidation

Special Tax Break for Distribution of Certain Installment Obligations by an S Corporation in Complete Liquidation

Plan of Liquidation

Reporting Requirements

Other Liquidation Rules

ILLUSTRATION 38-1: Filled-in Form 8869 Illustrating a QSub Election

ADMINISTRATIVE MATTERS

Chapter 39: Tax Years

Introduction

KEY ISSUE 39A Selecting the Initial Tax Year.

Calendar Year

Fiscal Year

Tax Year Choices for Newly Incorporated S Corporations

Tax Year Choices for C Corporations Electing S Status

Beginning of First S Corporation Year When C Corporation Elects S Status

Importance of Correctly Entering the Fiscal Year on Form 2553

Business Purpose Fiscal Years Established by Facts and Circumstances

KEY ISSUE 39B Applying for an Automatically Approved Fiscal Year.

Automatic Approval Provisions

New S Corporations Can Apply for a Fiscal Year on Form 2553

When Corporation Is Not Eligible for Automatic Approval of Fiscal Year

Natural Business Year--the 25% Test

Ownership Tax Year

KEY ISSUE 39C Making the Section 444 Election and Required Payments under IRC Sec. 7519.

Section 444 Election

Filing Form 8716 to Make the Section 444 Election

Form 8752, Required Payment or Refund under IRC Sec. 7519

Required Payments

Applicable Payments

Filing the Required-payment Form 8752 for a Newly Incorporated S Corporation

Refunds

Calendar Year Backup Request

Section 444 Backup Election When Business Purpose Year Is Requested

User Fee

Tiered Structures

Termination of Section 444 Election

Personal Service Corporation

Change to a Calendar Year

No Interest Paid on Refund of Required Payments

KEY ISSUE 39D Using the Fiscal Year Grandfather Rules.

S Corporation Can Continue to Use Fiscal Year under Grandfather Rules

Certain 1986 Tax Years Can Be Retained if Required Payments Are Made

KEY ISSUE 39E Applying the Short Tax Year Rules.

Short Tax Years

Depreciation

Pass-through to Shareholders

KEY ISSUE 39F Changing Tax Years (Existing S Corporations).

Tax Year Choices for Existing S Corporations

Changing to a Calendar Year

Business Purpose Fiscal Years

Changing to a Section 444 Fiscal Year

Required Payments

Changing from One Fiscal Year to Another under IRC Sec. 444

KEY ISSUE 39G Changing to a Calendar Year.

IRS Permission Not Required

Changing to a Calendar Year When S Corporation Is Terminating a Section 444 Election

Changing to a Calendar Year When S Corporation Is Not Terminating a Section 444 Election

Changing to Calendar Year Causes More Than 12 Months of Pass-through

KEY ISSUE 39H Changing Fiscal Year-end before Electing S Status.

KEY ISSUE 39I Changing the Fiscal Year-end following Termination of S Status.

C Corporations Can Use Fiscal Year

Special Procedure Permits Change in Tax Year

Filing Form 1128

Allocation of Income between S and C Short Years

KEY ISSUE 39J User Fee Applies to Certain Business-Purpose Year Applications.

Newly Electing S Corporation

Existing S Corporation

ILLUSTRATION 39-1: Selection of Natural Business Year

ILLUSTRATION 39-2: Calculation of Required Payment

Chapter 40: Accounting Methods

Introduction

KEY ISSUE 40A Using the Cash Method of Accounting.

Eligibility for the Cash Method of Accounting

Accounting Methods of Parent and QSub

Cash Method

Prepaid Expenses May be Deductible under the 12-Month Rule

Prepaid Interest

Prepaid Rent

Payment Made by Issuing Note

Tax Shelters Cannot Use Cash Basis

Hybrid Method

Cash and Accrual Basis Practice Aid

KEY ISSUE 40B Using the Accrual Method of Accounting.

Accrual Method

All Events Test

Economic Performance Rules

Safe Harbor--31/2-Month Prepaid Rule

Interest and Rent Expense

Payment Equals Economic Performance

Recurring Item Exception to Economic Performance Rules

Deductions Cannot Be Prorated for Purposes of the 31/2-Month Rule or the Recurring Item 81/2-Month Rule

Accrual Method S Corporation Can Deduct Certain Prepaid Expenses under 12-Month Rule

Change in Accounting Method May Be Required

Inventory Requirements Apply to S Corporations Engaged in Production, Purchase, or Sale of Goods

Charitable Contributions by Accrual-basis S Corporations

Cash and Accrual Basis Practice Aid

KEY ISSUE 40C Allowing Small Businesses with Gross Receipts of $1 Million or Less to Use Cash Method.

Gross Receipts Test

Conformity with the Corporation's Books and Records

Benefits of Qualifying for the Cash Method

Merchandise at Year-end Cannot Be Deducted

Converting to the Cash Method

Converting Back to the Accrual Method

Converting Accrual to Cash Basis and Vice Versa

KEY ISSUE 40D Allowing Certain S Corporations with Gross Receipts of $10 Million or Less to Use Cash Method.

Qualifying Taxpayers

Average Annual Gross Receipts

Treatment of Inventories

Converting to the Cash Method

Converting Back to the Accrual Method

Converting Accrual to Cash Basis and Vice Versa

KEY ISSUE 40E Applying the Uniform Capitalization (UNICAP) Rules.

Taxpayers Subject to the UNICAP Rules

Costs Subject to the UNICAP Rules

Interest Capitalization Rules

Allocating UNICAP Costs

KEY ISSUE 40F Reporting Income from Long-term Contracts.

Using the Percentage-of-completion Method

Applying the Look-back Method

Using the Completed Contract Method

Converting Book Income to Tax Income

Alternative Minimum Tax (AMT) Implications

Built-in Gains Tax Implications

Mid-contract Change in Taxpayer

Non-long-term Contract Activities

KEY ISSUE 40G Applying for Changes in Accounting Methods.

Change in Accounting Method

Nonautomatic Changes in Accounting Method

Taxpayers under Audit

Section 481(a) Adjustments

Limitations on a Positive Section 481(a) Adjustment

Certain Automatic and Nonautomatic Accounting Change Requests Can Be Made on a Single Form 3115

Comparing Automatic and Nonautomatic Accounting Method Change Applications

Distinguishing Between a Change in Accounting Method and Correction of an Error

KEY ISSUE 40H Making Automatic Changes in Accounting Methods.

Procedures for Making Automatic Changes in Accounting Methods

Filing Form 3115 for an Automatic Change

Comparing Automatic and Nonautomatic Accounting Method Change Applications

KEY ISSUE 40I Dealing with Accounting Method Changes Initiated by the IRS.

IRS Can Require Taxpayer to Change Back to an Impermissible Accounting Method

Procedures for Change of Accounting Method When Taxpayer Is under Audit

Procedures under Rev. Proc. 2002-18

ILLUSTRATION 40-1: Sample Form 3115 Requesting Change in Accounting Method

Chapter 41: Filing and Amending Form 1120S, Corporate Audits, and Penalties

Introduction

KEY ISSUE 41A Filing and Amending Form 1120S.

Requirement to Sign and File Form 1120S

Electronic Filing

Shareholder's Right to Review Form 1120S

Extending the Return Due Date

Authority to Postpone Certain Deadlines

Statute of limitations on Assessment

Amending Form 1120S

KEY ISSUE 41B Other Return Preparation Considerations.

Checklists for Avoiding a Return Preparer Penalty

Tax Return Preparation Engagement Letter

Other Tax Practice Tools

Circular 230 Tax Advice and Preparation Standards

Use and Disclosure of Tax Return Information

KEY ISSUE 41C IRS Registration and Regulation of Tax Return Preparers.

Preparers Required to Obtain a PTIN

Definition of a Tax Return Preparer

Applying for a PTIN

PTIN Renewals for 2012 Filing Season

Registered Tax Return Preparers

Return Preparation Standards

KEY ISSUE 41D Notifying IRS of Inconsistent Treatment of Subchapter S Items.

Inconsistent Treatment

Schedule K-1 Not Received

KEY ISSUE 41E Failing to File or Pay Penalties for Form 1120S.

Failure to File and Pay Penalties When Form 1120S Shows Tax Due

Failure to Furnish Schedules K-1

Failure to File or Furnish Required Information

KEY ISSUE 41F Avoiding the Accuracy-related Penalty.

Substantial Understatement Penalty

Negligence or Disregard of Rules and Regulations

KEY ISSUE 41G Avoiding a Tax Return Preparer Penalty.

Understanding the Basic and Increased Penalty

Who Is a Preparer for Penalty Purposes?

Form 1120S Preparer as Preparer of Shareholders' Returns

Reasonable Cause and Good Faith

Adequate Disclosure

Monetary Penalties for Circular 230 Violations

Importance of Due Diligence

KEY ISSUE 41H S Corporation Audit Issues.

ILLUSTRATION 41-1: Reporting Inconsistent Treatment on Form 8082

ILLUSTRATION 41-2: Reporting Schedule K-1 Not Received on Form 8082

ILLUSTRATION 41-3: Overview of Tax Return Preparer Requirements

ILLUSTRATION 41-4: Disclosure of Position Contrary to a Regulation on Form 8275-R

QUICK REFERENCE TABLES

TABLE T101: Comparison of Corporate and Noncorporate Attributes

TABLE T102: Advantages and Disadvantages of Operating as an S Corporation

TABLE T103: Comparison of Trusts Eligible to Hold S Corporation Stock

TABLE T104: Comparison of QSST and ESBT

TABLE T105: Flowchart for Obtaining Relief from a Late S Election

TABLE T201: Comparison of Organizational Costs, Start-up Costs, and Ordinary Business Expenses

TABLE T301: Interest Rates on Overpayments and Underpayments (2009-2011)

TABLE T302: Determination of Applicable Federal Rate (AFR)

TABLE T303: 2011 Imputed Interest AFR Tables

TABLE T304: Below-market Loans between S Corporations and Their Shareholders

TABLE T305: Tax Rates on Capital Gains and Dividends

TABLE T401: Employee Treatment of Employer Reimbursements or Allowances

TABLE T402: T&E Substantiation Requirements

TABLE T403: When Meal and Entertainment Expenses Are Deductible

TABLE T404: Deductible Travel Expenses

TABLE T405: When the 50% Limit Applies to Meal and Entertainment Expenses

TABLE T406: T&E Practice Aids

TABLE T501: Explanation of Contribution Limits by Type of Plan

TABLE T502: 2011 Contribution Limits by Type of Plan

TABLE T601: Standard Mileage Rate Method for Deductions (2011)

TABLE T602: Actual Cost Method for Deductions

TABLE T603: Deductions for Leased Autos

TABLE T604: Summary of Rules for Substantiation and Reporting for Employer-provided Auto

TABLE T605: Valuing Personal Use of Employer-provided Auto

TABLE T701: Items That Constitute Passive Investment Income

TABLE T702: Items That Result in Built-in Gains and Built-in Losses

TABLE T801: Claiming the Incremental Research Credit

TABLE T802: Claiming the Low-income Housing Credit

TABLE T803: Claiming the Disabled Access Credit

TABLE T804: Claiming the Investment Credit for Rehabilitation Expenditures

TABLE T805: Claiming the Work Opportunity Credit

TABLE T806: General Business Credits That Offset Both Regular and Alternative Minimum Tax

TABLE T807: Quick Reference to General Business Credit Forms and Dates

TABLE T901: Codes for Principal Business Activity

TABLE T902: Passive Activity Lines of Business Listing

TABLE T1001: Summary of Taxpayer and Return Preparer Penalties

TABLE T1002: Meeting the Substantial Authority Test

TABLE T1101: Items Affecting Stock Basis, AAA, and AE&P

TABLE T1102: Adjustments to Basis, AAA, and AE&P during the Post-termination Transition Period

TABLE T1201: Alternative Minimum Tax Adjustments and Preferences

TABLE T1202: Summary of Elections to Minimize AMT

TABLE T1301: Treatment of Commonly Encountered Items under Cash and Accrual Accounting Methods

TABLE T1302: Costs Subject to Capitalization under IRC Sec. 263A

TABLE T1303: Summary of Section 1244 Stock Requirements

TABLE T1304: Summary of Tax Results under Debt Discharge and Foreclosure Rules for an S Corporation

TABLE T1305: Summary of Procedures for Filing a Letter Ruling

DEPRECIATION TABLES

TABLE D101Recovery Periods for Common Assets

TABLE D201 Summary of Regular Tax Depreciation Rules Assets Placed in Service after 12/31/86 (or 7/31/86, if Election Made)

TABLE D202 Summary of AMT Depreciation Rules Assets Placed in Service after 12/31/86

TABLE D203 Summary of Depreciation Allowable in Year of Disposition

TABLE D204 Recap of Required and Elective Depreciation Methods for Both Regular Tax and AMT

TABLE D205 Depreciation Recapture

TABLE D206 Summary of Section 179 Deduction Amounts

TABLE D301 MACRS Personal Property, Half-year Convention

TABLE D302 MACRS Personal Property, Mid-quarter Convention--1st Quarter

TABLE D303 MACRS Personal Property, Mid-quarter Convention--2nd Quarter

TABLE D304 MACRS Personal Property, Mid-quarter Convention--3rd Quarter

TABLE D305 MACRS Personal Property, Mid-quarter Convention--4th Quarter

TABLE D401 MACRS Residential Rental Property (27.5-year Property)

TABLE D402 MACRS Nonresidential Real Property Placed in Service before May 13, 1993

TABLE D403 MACRS Nonresidential Real Property Placed in Service after May 12, 1993

TABLE D501 Luxury Auto Depreciation Dollar Limits

TABLE D502 MACRS Depreciation Rates for Autos

TABLE D503 Alternate MACRS (ADS) Rates for Autos

TAX ELECTIONS

ELECTION E101: Electing S Corporation Status

ELECTION E102: Extending the Time to Submit Omitted Shareholder's Consent to S Election

ELECTION E103: Extending the Time to Obtain Shareholder's Consent to S Election

ELECTION E104: Obtaining IRS Waiver of the Effects of an Invalid or Late S Election

ELECTION E105: Reelecting S Status within Five Years of Terminating an S Election

ELECTION E106: Treating a Qualified Subchapter S Trust (QSST) as a Permitted Shareholder

ELECTION E107: Refusing to Consent to a Qualified Subchapter S Trust (QSST) Election

ELECTION E108: Revoking a Qualified Subchapter S Trust (QSST) Election

ELECTION E109: Electing Small Business Trust (ESBT) Treated as a Permitted Shareholder

ELECTION E110: Treating a Subsidiary as a Qualified Subchapter S Subsidiary (QSub)

ELECTION E111: Obtaining IRS Waiver of Effects for Late Shareholder Consents in Community Property States

ELECTION E201: Transferor's and Transferee's Disclosure Statements in a Tax-free Incorporation

ELECTION E202: Deducting and Amortizing Organizational Expenditures

ELECTION E203: Deducting and Amortizing Start-up Expenditures

ELECTION E204: Electing to Capitalize Start-up Expenses

ELECTION E205: Electing to Capitalize Organizational Expenditures

ELECTION E301: Receipt of Restricted Property Treated as Current Compensation

ELECTION E401: Expensing Depreciable Property (Section 179)

ELECTION E402: Electing the Alternative Minimum Tax (AMT) Depreciation Method for Regular Tax

ELECTION E403: Adopting the Alternative Depreciation System (ADS) for Regular Tax

ELECTION E404: Electing Out of MACRS Depreciation

ELECTION E405: Using Straight-line in Lieu of MACRS Depreciation

ELECTION E406: Correcting Prior Years' Depreciation and Amortization Deductions

ELECTION E501: Reducing Basis by Items of Loss or Deduction before Nondeductible Expenses and Certain Oil and Gas Depletion

ELECTION E601: Electing to Bypass AAA

ELECTION E602: Forgoing Previously Taxed Income

ELECTION E603: Distributing a Deemed Dividend

ELECTION E604: Treating Distributions as Dividends during the Post-termination Transition Period

ELECTION E701: Section 59(e) Optional Amortization for Certain AMT Preferences

ELECTION E801: Aggregating Passive Activities

ELECTION E802: Electing to Adjust Basis for Unused Passive Activity Credits

ELECTION E803: Electing Out of the Self-charged Interest Rules

ELECTION E804: Treating All Interests in Rental Real Estate Activities as a Single Activity

ELECTION E901: Applying Specific Accounting Rules upon Termination of a Shareholder's Entire Interest

ELECTION E902: Applying Specific Accounting Rules upon a Qualifying Stock Disposition

ELECTION E903: Waiving Family Stock Ownership Attribution Rules and Consenting to Notify the IRS of Any Stock Acquisition Subsequent to Redemption

ELECTION E904: Recognizing Section 1244 Ordinary Loss on Stock Disposition

ELECTION E1001: Revoking the S Election

ELECTION E1002: Notifying the IRS of Termination of S Status

ELECTION E1003: Election to Determine Short-period Income Based on Specific Accounting

ELECTION E1004: Statement of Revocation of QSub Election

ELECTION E1005: Notification of Termination of QSub Status

ELECTION E1101: Adopting the Recurring Item Method for Certain Expenses

ELECTION E1102: Ratable Accrual of Real Property Taxes

ELECTION E1103: Deferring Gain from Involuntary Conversions

ELECTION E1104: Deducting Disaster Losses in Previous Tax Year

ELECTION E1105: To Request Extension of Time for Making an Election

ELECTION E1106: Deferral of Debt Discharge Income Following Repurchase of Debt

CHECKLISTS

CHECKLIST C101: Form 1120S Overall Due Diligence Review Checklist

CHECKLIST C102: Long- form 1120S Preparation Checklist

CHECKLIST C103: Short-form 1120S Preparation Checklist

CHECKLIST C104: Initial Year Checklist--Form 1120S

CHECKLIST C105: Final Year Checklist--Form 1120S

CHECKLIST C106: Avoiding a Section 6694 Return Preparer Penalty

CHECKLIST C107: Checklist for Preparing Forms 8275 and 8275-R

CHECKLIST C201: Eligibility to Elect S Status

CHECKLIST C202: Straight Debt Safe Harbor Requirements (Shareholder Debt and the Single-class-of-stock Rule)

CHECKLIST C203: Structuring Debt Securities to Be Valid Indebtedness

CHECKLIST C204: Checklist for Electing S Status

CHECKLIST C301: Factors in Establishing a Profit Motive (Not an all-inclusive list)

CHECKLIST C302: Factors Indicating Employee-shareholder Reasonable Compensation

CHECKLIST C303: Installment Sale Checklist for Form 1120S

CHECKLIST C401: Eligibility for Section 1244 Ordinary Loss Treatment

CHECKLIST C501: Domestic Production Activities Deduction

WORKSHEETS

WORKSHEET W101: Computing Recognized Gain and Distributee Shareholder Basis in a Partially Taxable Incorporation

WORKSHEET W201: Gain on Repossession of Real Property and Basis of Repossessed Real Property

WORKSHEET W202: Gain on Like-kind Exchanges and Basis of Property Received

WORKSHEET W203: Interest Expense Allocation Schedule

WORKSHEET W204: Vehicle Mileage Log

WORKSHEET W205: Corporate Records Supporting Section 1244 Ordinary Loss Treatment

WORKSHEET W206: Tracking M-1 Adjustments (Book-tax Differences)

WORKSHEET W301: Section 179 Taxable Income Limitation

WORKSHEET W302: Section 179 Carryover Schedule

WORKSHEET W303: Depreciation Schedule

WORKSHEET W304: Statutory Depletion Carryover Schedule

WORKSHEET W305: Oil and Gas Depletion Schedule

WORKSHEET W306: Cost Depletion Schedule

WORKSHEET W401: Built-in Gains Worksheet (For 2011 Tax Year)

WORKSHEET W402: Computing the Tax on Excess Net Passive Income

WORKSHEET W403: Computing the Tax for Short-period C Return

WORKSHEET W404: Computing the Section 444 Required Payment

WORKSHEET W501: Calculation of Basis in Stock and Debt

WORKSHEET W502: Calculations of Stock Basis, AAA, OAA, PTI, Retained Earnings, and AE&P

WORKSHEET W503: By-activity Information Worksheet

WORKSHEET W504: Record of Transfers of S Corporation Stock

WORKSHEET W505: Accrual to Cash Worksheet for Form 1120S

WORKSHEET W506: Cash to Accrual Worksheet for Form 1120S

WORKSHEET W507: Components of Suspended Loss Carryover

ADDITIONAL PREPARATION RESOURCES

RESOURCE R101: Engagement Letter for S Corporation Return

RESOURCE R102: Transmittal Letter for S Corporation Return (No State Returns Included)

RESOURCE R103: Transmittal Letter for S Corporation Return (State Returns Included)

RESOURCE R104: Transmittal Letter for Schedule K-1

RESOURCE R105: Filing Instructions for S Corporation Return

RESOURCE R106: Transmittal Letter for S Corporation Tax Organizer (Form 1120S)

RESOURCE R107: S Corporation Tax Organizer (Form 1120S)

RESOURCE R108: Short Form Tax Organizer

RESOURCE R201: Sample Form 2553--Election by a Small Business Corporation

RESOURCE R202: Sample Form 8869--Qualified Subchapter S Subsidiary Election

RESOURCE R203: Sample Form 1120S--U.S. Income Tax Return for an S Corporation

RESOURCE R204: Sample Schedule K-1 (Form 1120S)--Shareholder's Share of Income, Deductions, Credits, etc.

RESOURCE R301: New Tax Client Acceptance Form

RESOURCE R302: Tax Client Evaluation (Continuance) Form

RESOURCE R303: Tax Return Fee Estimate Worksheet

RESOURCE R401: Tax Research Request Form

RESOURCE R402: Tax Research Documentation Form

RESOURCE R403: Tax Information on the Internet

RESOURCE R501: Sample Letter on Small Employer Health Insurance Credit

RESOURCE R502: Important Business Tax Changes in 2010 Tax Relief Act

ROADMAP RM: Roadmap to S Corporation Tax Planning

ROADMAP RM-1

Introduction

ROADMAP RM-2

Form 1120S Roadmap--Client Summary Worksheet

ROADMAP RM-3

Roadmap to Form 1120S and Schedule K-1

ROADMAP RM-4

Roadmap Guidance

ROADMAP RM-4a

Section 1: Heading

ROADMAP RM-4b

Section 2: Income

ROADMAP RM-4c

Section 3: Deductions

ROADMAP RM-4d

Section 4: Tax and Payments

ROADMAP RM-4e

Section 5: Cost of Goods Sold

ROADMAP RM-4f

Section 6: Schedule B (Other Information)

ROADMAP RM-4g

Section 7: Schedule K (Shareholders' Pro Rata Share Items)

ROADMAP RM-4h

Section 8: Schedule L (Balance Sheet)

ROADMAP RM-4i

Section 9: Schedule M-1 [Reconciliation of Income (Loss) per Books with Income (Loss) per Return]

ROADMAP RM-4j

Section 10: Schedule M-2 (Analysis of Accumulated Adjustments Account, Other Adjustments Account, and Shareholder's Undistributed Taxable Income Previously Taxed)

ROADMAP RM-4k

Section 11: Allocation of Pass-through and Basis Adjustment

ROADMAP RM-4l

Section 12: Income and Loss

ROADMAP RM-4m

Section 13: Deductions

ROADMAP RM-4n

Section 14: Credits

ROADMAP RM-4o

Section 15: Foreign Taxes

ROADMAP RM-4p

Section 16: Adjustments and Tax Preferences

ROADMAP RM-4q

Section 17: Shareholder Basis

CPE & Training Solutions

INDEX

INTRODUCTORY MATERIAL ABOUT THE AUTHORS. . . LIST OF SUBSTANTIVE CHANGES AND ADDITIONS

CPE & Training Solutions

INDEX

INTRODUCTORY MATERIAL

ABOUT THE AUTHORS. . .

LIST OF SUBSTANTIVE CHANGES AND ADDITIONS