S corporations

Area 5: Federal Taxation of Entities (23-33%)

Your Progress

0 of 82 questions attempted

Topics

S election requirements and termination
Shareholder basis and distributions
Built-in gains and passive income

Lessons

S Corporations

Study Frameworks

Business Entity Taxation

Entity Types

C Corporation

Taxed at entity level (21% flat)

Double taxation on dividends

Unlimited shareholders

S Corporation

Pass-through (K-1)

≤100 shareholders

One class of stock

Shareholder basis: stock + debt to shareholder

Partnership

Pass-through (K-1)

Flexible allocations

Basis: capital + share of all liabilities

No entity-level tax

Sole Proprietorship

Schedule C

Self-employment tax

No separate entity

S Corporation Eligibility

Is the entity a domestic corporation?

Yes

Does it have ≤100 shareholders (family members count as one)?

Yes

Are all shareholders individuals, estates, certain trusts, or tax-exempt organizations?

Yes

Does it have only one class of stock?

Yes

Eligible for S election — file Form 2553

Not eligible — only one class of stock allowed

Not eligible — no C corps, partnerships, or nonresident aliens as shareholders

Not eligible — exceeds 100-shareholder limit

Not eligible — must be a domestic corporation

S Corp Shareholder Basis

Beginning Basis + Income + Capital Contributions − Distributions − Losses

Losses limited to stock basis + direct loans to corporation

Entity Comparison — Key Tax Characteristics

Feature	C Corp	S Corp	Partnership	Sole Prop
Tax form	1120	1120-S	1065	Schedule C
Entity-level tax	Yes (21%)	No	No	No
Pass-through	No	Yes (K-1)	Yes (K-1)	Yes (Sch C)
SE tax on owners	No	No (wages instead)	Yes (general partners)	Yes
Loss limitations	NOL rules	Stock + debt basis	Outside basis + at-risk + PAL	At-risk + PAL
Max shareholders/partners	Unlimited	100	Unlimited	1
Basis includes entity debt	N/A	No (direct loans only)	Yes (all liabilities)	N/A

S Corp AAA Ordering Rules (with Accumulated E&P)

Priority	Source	Tax Treatment
1st	Accumulated Adjustments Account (AAA)	Tax-free (previously taxed S corp income)
2nd	Accumulated E&P (from C corp years)	Taxable dividend
3rd	Remaining stock basis	Tax-free return of capital
4th	Excess over basis	Capital gain

DUSTDomestic corporation, Under 100 shareholders, Single class of stock, The right type of shareholders (individuals, estates, certain trusts)

S Corporation eligibility requirements. If you can't pass the DUST test, you can't elect S status.

DIMEDistributions reduce basis, Income increases basis, Minus losses (limited to basis), Excess losses suspended

S Corp shareholder basis ordering rules. Remember to follow the DIME when tracking basis.

Practice These Topics(82 questions)

S corporations

Area 5: Federal Taxation of Entities (23-33%)

Your Progress

0 of 82 questions attempted

Topics

S election requirements and termination
Shareholder basis and distributions
Built-in gains and passive income

Lessons

S Corporations

Study Frameworks

Business Entity Taxation

Entity Types

C Corporation

Taxed at entity level (21% flat)

Double taxation on dividends

Unlimited shareholders

S Corporation

Pass-through (K-1)

≤100 shareholders

One class of stock

Shareholder basis: stock + debt to shareholder

Partnership

Pass-through (K-1)

Flexible allocations

Basis: capital + share of all liabilities

No entity-level tax

Sole Proprietorship

Schedule C

Self-employment tax

No separate entity

S Corporation Eligibility

Is the entity a domestic corporation?

Yes

Does it have ≤100 shareholders (family members count as one)?

Yes

Are all shareholders individuals, estates, certain trusts, or tax-exempt organizations?

Yes

Does it have only one class of stock?

Yes

Eligible for S election — file Form 2553

Not eligible — only one class of stock allowed

Not eligible — no C corps, partnerships, or nonresident aliens as shareholders

Not eligible — exceeds 100-shareholder limit

Not eligible — must be a domestic corporation

S Corp Shareholder Basis

Beginning Basis + Income + Capital Contributions − Distributions − Losses

Losses limited to stock basis + direct loans to corporation

Entity Comparison — Key Tax Characteristics

Feature	C Corp	S Corp	Partnership	Sole Prop
Tax form	1120	1120-S	1065	Schedule C
Entity-level tax	Yes (21%)	No	No	No
Pass-through	No	Yes (K-1)	Yes (K-1)	Yes (Sch C)
SE tax on owners	No	No (wages instead)	Yes (general partners)	Yes
Loss limitations	NOL rules	Stock + debt basis	Outside basis + at-risk + PAL	At-risk + PAL
Max shareholders/partners	Unlimited	100	Unlimited	1
Basis includes entity debt	N/A	No (direct loans only)	Yes (all liabilities)	N/A

S Corp AAA Ordering Rules (with Accumulated E&P)

Priority	Source	Tax Treatment
1st	Accumulated Adjustments Account (AAA)	Tax-free (previously taxed S corp income)
2nd	Accumulated E&P (from C corp years)	Taxable dividend
3rd	Remaining stock basis	Tax-free return of capital
4th	Excess over basis	Capital gain

DUSTDomestic corporation, Under 100 shareholders, Single class of stock, The right type of shareholders (individuals, estates, certain trusts)

S Corporation eligibility requirements. If you can't pass the DUST test, you can't elect S status.

DIMEDistributions reduce basis, Income increases basis, Minus losses (limited to basis), Excess losses suspended

S Corp shareholder basis ordering rules. Remember to follow the DIME when tracking basis.

Practice These Topics(82 questions)