This post addresses questions in corporate taxation.
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1.Can the sec 1244 stock be preferred stock?
2.How low can the S corp owner set his own salary?
3.How are distributions taxed under an S corp?
4.Can an S corp owner forgo a salary for a distribution?
5.Is rental income considered active income?
6.How are C corporations different from and similar to S corporations?
7.Describe the three hurdles a taxpayer must pass if he wants to deduct a loss from his share in an S corporation.
8.How does the tax treatment of employee fringe benefits reflect the hybrid nature of the S corporation?
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Solution Summary
This solution discusses each of the following questions:
1.Can the sec 1244 stock be preferred stock?
2.How low can the S corp owner set his own salary?
3.How are distributions taxed under an S corp?
4.Can an S corp owner forgo a salary for a distribution?
5.Is rental income considered active income?
6.How are C corporations different from and similar to S corporations?
7.Describe the three hurdles a taxpayer must pass if he wants to deduct a loss from his share in an S corporation.
8.How does the tax treatment of employee fringe benefits reflect the hybrid nature of the S corporation?
Solution Preview
1.Can the sec 1244 stock be preferred stock?
Yes, 1244 stock can be common or preferred stock as long as the criteria are met for 1244 stock. More specifically, "Common stock, and preferred stock issued after July 18, 1984, qualifies as §1244 stock. In order to qualify as §1244 stock, the stock must be issued, and the consideration paid by the shareholder must consist of money or other property, not services. Stock and other securities are not "other property" for this purpose. However, cancellation of indebtedness may be sufficiently valid consideration" Groco.com, 2012). As long as the conditions of the preferred stock are in compliance with the Internal Revenue Code, it can certainly be preferred stock.
Quote referenced: http://www.groco.com/readingroom/sec1244_sbss.aspx
2.How low can the S corp owner set his own salary?
The owner of an S corp. can continue setting his or her salary as long as the compensation is considered reasonable. Basically, at any stage during the life of the S corporation and regardless of other owners/shareholders/investors the owners must continue to draw a salary and that salary must be reasonable. The salary cannot be zero as it would not be reasonable and it cannot be an unreasonably high amount. As long as the salary is reasonable, the owner can ...
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