Chapter 11 S Corporations

In General

Slide 7-3 S Corporations [IRC §1363(a)] For federal income tax purposes, S corporations are tax reporting entities but not tax paying entities (except as otherwise provided) Separate return filed (Form 1120S) Reporting to owners (Schedule K-1)

Slide 7-4 Multiple Entity Structures [IRC §1504(b)(8)] S corporations owning stock of a C corporation cannot file a consolidated return with the C corporation [IRC §1361(b)(3)] If an S corporation owns 100% of the stock of a Qualifying Subchapter S Subsidiary (QSSS) and makes an election, the two corporations are treated as one entity

Slide 7-5 Accounting Periods Shareholders report their flow-through items from the S corporation in their taxable year within which the corporation’s tax year ends [IRC §1366(a)]

Slide 7-6 Accounting Periods S corporation’s generally must use a calendar (December 31) year-end unless can establish a business purpose, to the satisfaction of the IRS, for a different year-end [IRC §1378]

Slide 7-7 Accounting Periods S Corporations an elect a fiscal year-end other than the required fiscal year-end if: Deferral period is 3 months or less [IRC §444(a) and (b)(1)] Non-interest bearing deposit is maintained with the IRS [IRC §444(c)(1)] Deposit essentially equals the highest individual tax rate times the deferral ratio (deferral months/months in tax year) times net income shareholders are subject to tax on [IRC §7519]

S Corporations Allocations

Slide 7-9 Allocations [IRC §1366(a)] S corporations’ income, losses, etc. flow through to shareholders Any items that may affect different taxpayers differently are reported as separately stated items [IRC §1363(b)(1) and IRC §1366(a)(1)(A)] Items that do not affect different taxpayers differently are combined and reported as one item [IRC §1366(a)(1)(B) & (a)(2)] Character of items is determined as if directly realized by the shareholder [IRC §1366(b)]

Slide 7-10 State Income Taxes For state income tax, S corporations are taxed in the same manner as any other corporation (rather than as a flow through entity) in many states Taxes paid to states are separately stated items [IRC §1366(a)(1) and IRC §702(a)(6)]

Slide 7-11 Elections [IRC §1363(c)] The corporation makes any elections that affect computations of separately stated items or nonseparately stated income or loss except for: Election to deduct certain mining exploration costs rather than using units of production method Election to take a foreign tax credit rather than deducting income taxes paid to foreign countries

Slide 7-12 Prorata Share [IRC §1366(a)(1)] S corporation shareholders take into account their “prorata share” of all the corporations’ separately stated items and its nonseparately stated income or loss Prorata share is determined based on days and shares outstanding [IRC §1377(a)(1)]

Slide 7-13 Allocations See Example 1: Questions 1, 2, 3, & 4

S Corporations Basis in S Corporation Stock

Slide 7-15 Beginning Basis [IRC §1012] Beginning basis in stock acquired by purchase or in a taxable exchange is its cost [IRC §358(a)(1)] Beginning basis in stock acquired in an IRC §351 transactions equals: The basis of assets given up Plus gain recognized on the exchange Less the FMV of boot received

Slide 7-16 Basis Adjustments [IRC §1367(a)] Basis is adjusted each year for: Pro rata share of S corporation’s separately stated items and nonseparately stated income or loss (+/-) Pro rata share of S corporation’s expenses not deductible in computing taxable income and not chargeable to capital account (-) Pro rata share of cash distributions made by the corporation that are not includible in income by reason of IRC §1368 (-)

Slide 7-17 S Corporation Stock Basis See Example 1: Questions 5 & 6