1. Advanced Tax Strategies
for S Corporations

2. American Recovery and Reinvestment Act of 2009
1-1
American Recovery and Reinvestment Act of 2009
Extended carryback period for NOLs arising from small businesses
Built-in gain tax not imposed on the 8th, 9th or 10th year of recognition period
COD income may be deferred to 2014 and taxed over 5 years
Private Activity Bond interest not subject to AMT

3. 2008 Tax Extenders and AMT Relief Act
1-2
2008 Tax Extenders and AMT Relief Act
Tax preparers may use the substantial authority standard in non-tax-shelters
R&D credit extended to 2008 and 2009
Incremental credit repealed after 2008
Rules under Rev. Rul for charitable contributions extended to 2008 and 2009

4. The Small Business and Work Opportunity Tax Act of 2007
1-3
The Small Business and Work Opportunity Tax Act of 2007
Bank S corporations
Change to reserve method
Bank director shares
Accumulated earnings & profits
ESBT
Sale of QSub stock
More-likely-than-not standard

5. The American Jobs Creation Act of 2004
1-4
The American Jobs Creation Act of 2004
Increase in number of shareholders
Limit increased to 100
Family treated as 1 shareholder
Inadvertent termination relief
IRA as an S corporation bank shareholder
ESBT beneficiary defined

6. The American Jobs Creation Act of 2004 – Losses
1-5
The American Jobs Creation Act of 2004 – Losses
Transfer of suspended loss to spouse
Passive activity losses and at risk amounts for QSSTs

7. The American Jobs Creation Act of 2004 – QSub
1-6
The American Jobs Creation Act of 2004 – QSub
Inadvertent invalid election relief
QSub information returns
No longer on the no ruling list

8. 3 – Basis in S Corporation Stock
Understand the rules relating to the adjustment of basis in stock by S corporation shareholder
Understand how losses are limited by basis

9. Computation of Basis Original basis + Additional capital contribution
3-1
Computation of Basis
Original basis
+ Additional capital contribution
+ Share of separately stated income items
+ Share of nonseparately stated income and gains
+ Share of tax exempt income
+ Excess of deduction for depletion over the basis of the property subject to depletion
- Distributions
- Share of nondeductible, non-capital expenses
- Share of nonseparately stated ordinary loss
- Share of separately stated deductions/losses
- Shareholder’s deduction for depletion
Shareholder’s stock basis not below zero

10. Adjustments to Basis Basis is adjusted in the following order
3-2
Adjustments to Basis
Basis is adjusted in the following order
All positive items
Distributions
Nondeductible, noncapital expenses
Other deductions
Basis is generally computed at year-end
Basis is adjusted per share

11. Basis of Indebtedness Must be direct shareholder debt
3-3
Basis of Indebtedness
Must be direct shareholder debt
Personal guarantees do not increase basis
Stock basis is decreased by losses first, then basis in debt
Basis in debt is restored before basis in stock

12. 3-4
Economic Outlay
Shareholder acquires basis in debt only if they experience an actual economic outlay
Issue becomes a problem with
Loans from related entities
Back-to-back loans

13. Limitation of Deduction of Losses
3-5
Limitation of Deduction of Losses
Amount of losses that can be deducted limited to the sum of the shareholder’s basis in stock and direct loans
Losses limited by Section 1336(d) are carried over indefinitely
Losses carried over only with respect to that shareholder
Losses are then limited by at-risk basis and passive activity rules

14. 4 – Distributions Be able to apply the rules for cash distributions
Be aware of the rules for property distributions
Understand the ordering of distributions

15. 4-1
Distributions
Distributions are payments to shareholders that are based on stock ownership
No effect on corporate income
Whether or not taxable to the shareholder depends on if the S corporation has AE&P

16. Cash Distributions Made by S Corporation without E&P
4-2
Cash Distributions Made by S Corporation without E&P
Tax-free return of stock basis
Distribution reported when received
Gain only if amount received exceeds basis
Distribution reduces basis in stock

17. Cash Distributions Made by S Corporation with AE&P
4-3
Cash Distributions Made by S Corporation with AE&P
Distributions come out of the following accounts in the order shown
Accumulated Adjustments Account (AAA)
Previously Taxed Income (PTI)
Accumulated Earnings & Profit (AE&P)
Other Adjustments Account (OAA)
Election allowed under Section 1368(d) to take distribution out of AE&P first

18. Tax Effect of Distributions
4-4
Tax Effect of Distributions
AAA, PTI, and OAA –
Nontaxable to the extent of basis;
Gain in excess of basis
AE&P –
Taxable Dividend;
No effect on basis

19. 4-5
AAA
Balance starts at zero the 1st day of the 1st taxable year after 1982
Increased by
Nonseparately stated income;
Separately stated items of income and gain;
Excess depletion (other than oil and gas); and
Decreased by
Nonseparately stated loss;
Separately stated items of loss or deduction;
Nondeductible or noncapital expenses;
Cost depletion

20. Differences between AAA and Basis
4-6
Differences between AAA and Basis
The AAA increases and decreases by the same items as basis does each year, except
Tax-exempt income increases basis, but does not increase the AAA
Expenses relating to tax-exempt income reduce basis, but do not decrease the AAA
Federal taxes relating to a C corporation year reduce basis, but do not decrease the AAA
The order that increases and decreases is applied to basis and AAA differs
Losses and deductions (but not distributions) can reduce the AAA below zero. Basis can never have a negative balance

21. Property Distributions
4-7
Property Distributions
Amount Distributed = FMV of property
S corporation must recognize income (but not loss) as if the property had been sold
Sale could be subject to BIG tax

22. Post-termination Transition Period (PTTP)
4-8
Post-termination Transition Period (PTTP)
Cash distributions during PTTP applied against basis to the extent of AAA
PTTP begins on the day after the last day as S corporation and ends the later of (1) one year after termination, (2) the due date (including extended date) of final S return or (3)120 days after a final determination (e.g., court decision) that S election was terminated