Advanced entity taxation
The S Corporation Plan
Keep S status clean, then run the mechanics in order: increase basis before decreasing, deduct losses to stock then debt, and route distributions through AAA.
How the exam words it
- -The stem lists shareholders or stock features and asks whether the corporation is eligible to elect or keep S status.
- -It gives stock and debt basis and an allocated loss and asks the deductible loss and the suspended amount.
- -It gives AAA, C-corporation E&P, basis, and a distribution and asks how much is a taxable dividend.
- -It asks how income is allocated among shareholders (per-share, per-day), or computes the built-in gains tax after a C-to-S conversion.
The playbook
- 1Confirm eligibility: a domestic corporation, 100 or fewer eligible shareholders, one class of stock, and no partnership, corporation, or nonresident-alien owners.
- 2Adjust stock basis by increasing for income first, then decreasing for distributions, then nondeductible items, then losses, never below zero.
- 3Deduct losses against stock basis, then direct-loan debt basis, and suspend any excess to carry forward.
- 4Order distributions with C E&P as tax-free AAA to basis, then a dividend from E&P, then return of basis, then gain, and tax built-in gains at 21 percent within the recognition period.
The trap
Reducing basis for losses before distributions, or giving debt basis for a guarantee of corporate bank debt. Distributions reduce basis first, and only direct shareholder loans create debt basis.
How the exam varies it
The same pattern, re-skinned along these axes:
Eligibility requirements and events that terminate the electionStock-then-debt loss limitation and basis adjustment orderingDistribution ordering with C E&P and AAA versus the built-in gains tax
Drill this pattern
8 questions of The S Corporation Plan from across the AUD topics. Clear it by getting 5 right with a streak of 3.