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S Corporations

11. Chapter. S Corporations. S Corporations. In General. 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)

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S Corporations

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  1. 11 Chapter S Corporations

  2. S Corporations In General

  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)

  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

  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)]

  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]

  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]

  8. S Corporations Allocations

  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)]

  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)]

  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

  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)]

  13. Allocations • See Example 1: Questions 1, 2, 3, & 4

  14. S Corporations Basis in S Corporation Stock

  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

  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 (-)

  17. S Corporation Stock Basis • See Example 1: Questions 5 & 6

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