Chapter 22 Key Terms

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Accumulated adjustments account (AAA)	an account that reflects the cumulative income or loss for the time the corporation has been an S corporation.
At-risk amount	an investor’s risk of loss in a worst-case scenario. In a partnership, an amount generally equal to a partner’s tax basis exclusive of the partner’s share of nonrecourse debt.
Built-in gains tax	a tax levied on S corporations that were formerly C corporations. The tax applies to net unrealized built-in gains at the time the corporation converted from a C corporation to the extent the gains are recognized during the built-in gains tax recognition period. The applicable tax rate is 21 percent.
Built-in gains tax recognition period	the first five years a corporation operates as an S corporation after converting from a C corporation.
Debt basis	the outstanding principal of direct loans from an S corporation shareholder to the S corporation. Once taxpayers deduct losses to the extent of their stock basis, they may deduct losses to the extent of their debt basis. When the debt basis has been reduced by losses, it is restored by income/gain allocations.
Earnings and profits (E&P)	a measure of a corporation’s earnings that is similar to its economic earnings. Corporate dividends are taxable to shareholders to the extent they come from earnings and profits.
Excess business loss	excess of aggregate business deductions for the year over aggregate business gross income or gain of an individual taxpayer plus a threshold amount depending on filing status.
Excess net passive income	net passive investment income × passive investment income in excess of 25 percent of the S corporation’s gross receipts divided by its passive investment income.
Excess net passive income tax	a tax levied on an S corporation that has accumulated earnings and profits from years in which it operated as a C corporation if the corporation reports excess net passive income.
Form 1120-S	the form S corporations file annually with the IRS to report S corporation ordinary income (loss) and separately stated items for the year.
Form 2553	the form filed to elect S corporation status.
Form 7004	the form C corporations, partnerships, and S corporations file to receive an automatic extension to file their annual tax return.
Gross receipts	(for S corporations) the total amount of revenues (including passive investment income) received or accrued under the corporation’s accounting method, not reduced by returns, allowances, cost of goods sold, or deductions. Gross receipts include net capital gains from the sales or exchanges of capital assets and gains from the sale or exchange of stock or securities (losses do not offset gains).
LIFO recapture amount	the excess of a C corporation’s inventory basis under the FIFO method in excess of the inventory basis under the LIFO method in its final tax year as a C corporation before it becomes an S corporation.
LIFO recapture tax	a tax levied on a C corporation that elects to be taxed as an S corporation when it is using the LIFO method for accounting for inventories.
Net passive investment income	passive investment income less any expenses connected with producing it.
Net unrealized built-in gain	the net gain (if any) an S corporation that was formerly a C corporation would recognize if it sold each asset at its fair market value. It is measured on the first day of the corporation’s first year as an S corporation.
Ordinary business income (loss)	a partnership’s or S corporation’s remaining income or loss after separately stated items are removed. It is also referred to as nonseparately stated income (loss).
Passive activity loss (PAL) rules	tax rules designed to limit taxpayers’ ability to deduct losses from activities in which they don’t materially participate against income from other sources.
Passive investment income (PII)	royalties, rents, dividends, interest (including tax-exempt interest), annuities, and gains from the sale or exchange of stock or securities.
Post-termination transition period (PTTP)	the period that begins on the day after the last day of a corporation’s last taxable year as an S corporation and generally ends on the later of (a) one year after the last S corporation day or (b) the due date for filing the return for the last year as an S corporation (including extensions).
S corporation	a corporation under state law that has elected to be taxed under the rules provided in Subchapter S of the Internal Revenue Code. Under Subchapter S, an S corporation is taxed as a flow-through entity.
Separately stated items	income, expenses, gains, losses, credits, and other items that are excluded from a partnership’s or S corporation’s operating income (loss) and disclosed to partners in a partnership or shareholders of an S corporation separately because their tax effects may be different for each partner or shareholder.

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