Chapter 17
Partnerships and
S Corporations
Learning Objectives
? Determine the tax implications of a partnership
formation
? Apply the operating rules for partnerships
? Understand the tax implications (to the
partnership and its partners) of distributions to
partners
? Understand the requirements for electing and
maintaining S Corporation status
? Apply the operating rules for S Corporations
? Determine tax treatment of an S Corporation’s
shareholders
Types Of Flow-through
Entities
? Partnerships
? S corporations
? Limited liability
companies(LLC)
? Limited liability
partnerships(LLP)
Flow-through Entities,
? Entail taxation,only at the ownership level,
This single level of taxation,is achieved
by,
– (1) exempting the entity from taxation
– (2) passing income,deductions,losses,and
credit through to the owners,and
– (3) adjusting the basis of the owners’ interest
in the entity
Taxation Of Partnerships
? Formation of a partnership
? Partnership operations
? Special allocations
? Allocation of partnership
income,deductions,losses,
and credits to partners
? Basis adjustments for
operating items
Taxation Of Partnerships
? Limitations on losses and restoration of basis
? Transactions between a partner and the
partnership
– Sale or exchanges between a partner and
partnership
– Guaranteed payments
? Partnership distributions
? Sale of a partnership interest
? Large partnership election
Formation Of A Partnership
? In exchange for
property and/or
services,partners
receive an interest
? A partnership
interest is an
investment
security similar to
corporate stock
Formation Of A Partnership
? Section 721,non-recognition
rules
? Basis of a partnership interest
? Section 752 adjustment
? Negative basis rule
? Holding period for a
partnership interest
? Basis of partnership assets
? Financial accounting
considerations
? Organizational & syndication
fees
Operating Rules For Partnerships
? Certain items are passed
through to partners without
losing their identity
– These should be separately stated
due to each partner’s different tax
situation
? Items that do not have special
tax effect are netted at the
partnership level and the
results are ordinary income or
loss,then allocated to partners
based on agreement
Partnership Elections
? Tax year restrictions
? Cash method of accounting restrictions
Taxation Of S Corporations
? Qualification
requirements
? Election requirements
? Termination conditions
? S Corporation
operations
? Basis adjustments to S
Corporation stock
? S Corporation losses
and limitations
? Other S Corporation
considerations
S Corporation Qualification
? Must be a domestic corporation
? Maximum of 75 shareholders allowed
(husband/wife=1)
? Only individuals (citizens or resident aliens),estates,
certain kinds of trusts,and certain kinds of tax-
exempt can be shareholders
? Only one class of stock may be issued and
outstanding
? If an S Corporation has an 80% owned subsidiary,it
cannot file a consolidated tax return with that
subsidiary,Certain corporation that maintain special
tax statuses are ineligible
S Corporation Election
Requirements
? All shareholders on
the S Corporation
election date must
consent and the
corporation must
file Form 2553
? Must be filed on or
before the 15th day
of the 3rd month of
the election year
? For voluntary revocation,consent must be
obtained from shareholder’s owning > 50% of S
Corporation’s stock
? An involuntary revocation can be forced if,
– Fails to meet qualification requirements
– Has excessive passive investment income in a
3-year period
? Corporation may not re-elect S Corp,Status for 5
years after termination
S Corporation Termination Rules
Tax Treatment Of An S Corporation’s
Shareholders
? Basis adjustments
– Prevents double taxation of income or double
deduction of losses
? Shareholder gets debt basis,separate from stock
basis,for amounts lent directly to the corporation;
gets no basis for corporate level liabilities
? Loss limitation is computed before distributions
? Applies losses to both stock & debt basis,in that
order
Other S Corporation
Considerations
? Distributions of cash and property to
shareholders
? Tax year restrictions
? Treatment of fringe benefits
? Corporate tax on built-in gains
? Tax on excess net passive income
Tax Planning
Considerations
? Use of net
operating losses
? Income shifting
among family
members
? Optional basis
adjusting under
Sec,754
Compliance & Procedural
Considerations
? Partnership filing requirements and elections
? Reporting partnership items on Form 1065 on
or before the fifteenth day of the fourth month
? S Corporation filing requirements and
accounting method elections
? Reporting S Corporation items on Form
1120S
? Comparison of alternative forms of business
organizations (See Table I 17-2)
Partnerships and
S Corporations
Learning Objectives
? Determine the tax implications of a partnership
formation
? Apply the operating rules for partnerships
? Understand the tax implications (to the
partnership and its partners) of distributions to
partners
? Understand the requirements for electing and
maintaining S Corporation status
? Apply the operating rules for S Corporations
? Determine tax treatment of an S Corporation’s
shareholders
Types Of Flow-through
Entities
? Partnerships
? S corporations
? Limited liability
companies(LLC)
? Limited liability
partnerships(LLP)
Flow-through Entities,
? Entail taxation,only at the ownership level,
This single level of taxation,is achieved
by,
– (1) exempting the entity from taxation
– (2) passing income,deductions,losses,and
credit through to the owners,and
– (3) adjusting the basis of the owners’ interest
in the entity
Taxation Of Partnerships
? Formation of a partnership
? Partnership operations
? Special allocations
? Allocation of partnership
income,deductions,losses,
and credits to partners
? Basis adjustments for
operating items
Taxation Of Partnerships
? Limitations on losses and restoration of basis
? Transactions between a partner and the
partnership
– Sale or exchanges between a partner and
partnership
– Guaranteed payments
? Partnership distributions
? Sale of a partnership interest
? Large partnership election
Formation Of A Partnership
? In exchange for
property and/or
services,partners
receive an interest
? A partnership
interest is an
investment
security similar to
corporate stock
Formation Of A Partnership
? Section 721,non-recognition
rules
? Basis of a partnership interest
? Section 752 adjustment
? Negative basis rule
? Holding period for a
partnership interest
? Basis of partnership assets
? Financial accounting
considerations
? Organizational & syndication
fees
Operating Rules For Partnerships
? Certain items are passed
through to partners without
losing their identity
– These should be separately stated
due to each partner’s different tax
situation
? Items that do not have special
tax effect are netted at the
partnership level and the
results are ordinary income or
loss,then allocated to partners
based on agreement
Partnership Elections
? Tax year restrictions
? Cash method of accounting restrictions
Taxation Of S Corporations
? Qualification
requirements
? Election requirements
? Termination conditions
? S Corporation
operations
? Basis adjustments to S
Corporation stock
? S Corporation losses
and limitations
? Other S Corporation
considerations
S Corporation Qualification
? Must be a domestic corporation
? Maximum of 75 shareholders allowed
(husband/wife=1)
? Only individuals (citizens or resident aliens),estates,
certain kinds of trusts,and certain kinds of tax-
exempt can be shareholders
? Only one class of stock may be issued and
outstanding
? If an S Corporation has an 80% owned subsidiary,it
cannot file a consolidated tax return with that
subsidiary,Certain corporation that maintain special
tax statuses are ineligible
S Corporation Election
Requirements
? All shareholders on
the S Corporation
election date must
consent and the
corporation must
file Form 2553
? Must be filed on or
before the 15th day
of the 3rd month of
the election year
? For voluntary revocation,consent must be
obtained from shareholder’s owning > 50% of S
Corporation’s stock
? An involuntary revocation can be forced if,
– Fails to meet qualification requirements
– Has excessive passive investment income in a
3-year period
? Corporation may not re-elect S Corp,Status for 5
years after termination
S Corporation Termination Rules
Tax Treatment Of An S Corporation’s
Shareholders
? Basis adjustments
– Prevents double taxation of income or double
deduction of losses
? Shareholder gets debt basis,separate from stock
basis,for amounts lent directly to the corporation;
gets no basis for corporate level liabilities
? Loss limitation is computed before distributions
? Applies losses to both stock & debt basis,in that
order
Other S Corporation
Considerations
? Distributions of cash and property to
shareholders
? Tax year restrictions
? Treatment of fringe benefits
? Corporate tax on built-in gains
? Tax on excess net passive income
Tax Planning
Considerations
? Use of net
operating losses
? Income shifting
among family
members
? Optional basis
adjusting under
Sec,754
Compliance & Procedural
Considerations
? Partnership filing requirements and elections
? Reporting partnership items on Form 1065 on
or before the fifteenth day of the fourth month
? S Corporation filing requirements and
accounting method elections
? Reporting S Corporation items on Form
1120S
? Comparison of alternative forms of business
organizations (See Table I 17-2)
