1
Chapter 11,
S Corporations
2
S CORPORATIONS
(1 of 2)
?S corporation requirements
?S corporation election
?Termination of S election
?Tax year
?Ordinary income/loss and
separately stated items
?Special S corporation taxes
3
S CORPORATIONS
(2 of 2)
?Shareholder allocations
?Loss limitations
?Additional limitations
?Family S corporations
?Basis adjustments
?S corporation distributions
4
S Corporation
Requirements (1 of 2)
?Shareholder requirements
–No more than 75 shareholders
–Individuals,estates or certain types of
trusts
–U.S,citizens or resident aliens
–Tax-exempt public charity or private
foundation may be a shareholder as
of 1998
5
S Corporation
Requirements (2 of 2)
?Corporation-related requirements
–Domestic corporation
–Must not be an,ineligible” corporation
–Only one class of stock
–May be a Qualified Subchapter S
Subsidiary (QSSS)
6
S Corporation Election
?Form 2553 must be filed no later
than 15th day of third month for
year election is to be effective
–A new corporation’s tax year begins
on first day it acquires assets,has
shareholders or begins business
?All shareholder must consent to
election
7
Termination of S Election
(1 of 2)
?S election terminated when
–Corporation either voluntarily revokes
the election (owners of more than
50% of the corporation’s stock must
agree) or
–Corporation ceases to meet small
business corporation requirements
8
Termination of S Election
(2 of 2)
?If termination occurs during tax year
–Portion of year prior to termination is a
short S corp year and
–Portion of year after termination is a short
C corp year
?Inadvertent termination can be undone
?New S corp election cannot be made for
5 tax years after termination
9
Tax Year
(1 of 2)
?Permitted tax years
–A year ending on December 31,or
–Any fiscal year where a business
purpose has been established
including a natural business year
10
Tax Year
(2 of 2)
?Other tax years may be elected
–Ownership year - same year as
shareholders owning 50% of stock
–Facts and circumstances year
–Grandfathered years - IRS approved
the year after June 30,1974
–Sec,444 year - deferral period of 3
months or less with advance payments
11
Ordinary Income/Loss &
Separately Stated Items (1 of 2)
?Income is divided between ordinary
and separately stated items
?Separately stated items same as
for partnerships plus passive
activities and portfolio activities
?Refer to Form 1120S Schedule K in
Appendix B for a complete listing
12
Ordinary Income/Loss &
Separately Stated Items (2 of 2)
?S corps cannot deduct
–Dividends-received deduction
–Personal or dependency exemption
–“Personal” itemized deductions
–Taxes paid/accrued to foreign country
–Charitable contributions
–Oil & gas depletion or NOL carrybacks
13
Special S Corporation
Taxes
?Special levies apply to S corps
–Excess net passive income tax
–Built-in gains tax
–LIFO recapture tax
14
Shareholder Allocations
?S/hs report pro rata share of ordinary
income & separately stated items
–1,Divide item by # of days in tax year
–2,Divide daily amount by # of shares
outstanding
–3,Total daily allocations for a share
–4,Multiply amount per share times # of
shares held by owner
–See Example C11-16
15
Loss Limitations
?Ordinary & separately stated loss
amounts,passed” through to s/h
?S/h’s deduction limited to adjusted
basis in stock plus adjusted basis of
debt owed directly by corp to s/h
16
Additional Limitations
?§ 465 at-risk rules applied at s/h
level
?Passive activity rules
–S/h must meet material participation
std,to avoid passive activity limitation
?§ 183,hobby loss” rules apply at s/h
level
17
Family S Corporations
?Donee or purchaser of stock in S
corp not considered a s/h unless
–Such stock acquired in bona fide
transaction AND
–Donee or purchaser is the real owner
of stock
18
Basis Adjustments
(1 of 2)
Initial investment
+ Additional contributions
+ Share of income/separate items
- Distrib’s excluded from s/h gross inc,
- Non-deductible expenses not
chargeable to capital
- Share of losses/distributions
= Ending basis (but not below zero)
19
Basis Adjustments
(2 of 2)
?Basis adjustments to s/h debt
–After stock basis reduced to zero,
basis reduction applies to
indebtedness based on relative
adjusted basis for each loan
20
S Corporation
Distributions (1 of 2)
?Distributions for S Corp w/o AE&P
–Money distributions tax-free and
reduce s/h basis,but not below zero
–When s/h has a zero basis,
distributions received treated as gain
from sale of stock
–Corporation recognizes gain on
distribution of appreciated property
21
S Corporation
Distributions (2 of 2)
?Distributions for S Corp w/ AE&P
–Distributions based on tiers of earnings
?Distributions from AAA are tax-free
?Distributions from AE&P are taxable
?Distributions that reduce basis in S corp
stock are tax-free
?Distributions over stock basis are taxable
–See Table C11-1 and Example C11-27
22
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Chapter 11,
S Corporations
2
S CORPORATIONS
(1 of 2)
?S corporation requirements
?S corporation election
?Termination of S election
?Tax year
?Ordinary income/loss and
separately stated items
?Special S corporation taxes
3
S CORPORATIONS
(2 of 2)
?Shareholder allocations
?Loss limitations
?Additional limitations
?Family S corporations
?Basis adjustments
?S corporation distributions
4
S Corporation
Requirements (1 of 2)
?Shareholder requirements
–No more than 75 shareholders
–Individuals,estates or certain types of
trusts
–U.S,citizens or resident aliens
–Tax-exempt public charity or private
foundation may be a shareholder as
of 1998
5
S Corporation
Requirements (2 of 2)
?Corporation-related requirements
–Domestic corporation
–Must not be an,ineligible” corporation
–Only one class of stock
–May be a Qualified Subchapter S
Subsidiary (QSSS)
6
S Corporation Election
?Form 2553 must be filed no later
than 15th day of third month for
year election is to be effective
–A new corporation’s tax year begins
on first day it acquires assets,has
shareholders or begins business
?All shareholder must consent to
election
7
Termination of S Election
(1 of 2)
?S election terminated when
–Corporation either voluntarily revokes
the election (owners of more than
50% of the corporation’s stock must
agree) or
–Corporation ceases to meet small
business corporation requirements
8
Termination of S Election
(2 of 2)
?If termination occurs during tax year
–Portion of year prior to termination is a
short S corp year and
–Portion of year after termination is a short
C corp year
?Inadvertent termination can be undone
?New S corp election cannot be made for
5 tax years after termination
9
Tax Year
(1 of 2)
?Permitted tax years
–A year ending on December 31,or
–Any fiscal year where a business
purpose has been established
including a natural business year
10
Tax Year
(2 of 2)
?Other tax years may be elected
–Ownership year - same year as
shareholders owning 50% of stock
–Facts and circumstances year
–Grandfathered years - IRS approved
the year after June 30,1974
–Sec,444 year - deferral period of 3
months or less with advance payments
11
Ordinary Income/Loss &
Separately Stated Items (1 of 2)
?Income is divided between ordinary
and separately stated items
?Separately stated items same as
for partnerships plus passive
activities and portfolio activities
?Refer to Form 1120S Schedule K in
Appendix B for a complete listing
12
Ordinary Income/Loss &
Separately Stated Items (2 of 2)
?S corps cannot deduct
–Dividends-received deduction
–Personal or dependency exemption
–“Personal” itemized deductions
–Taxes paid/accrued to foreign country
–Charitable contributions
–Oil & gas depletion or NOL carrybacks
13
Special S Corporation
Taxes
?Special levies apply to S corps
–Excess net passive income tax
–Built-in gains tax
–LIFO recapture tax
14
Shareholder Allocations
?S/hs report pro rata share of ordinary
income & separately stated items
–1,Divide item by # of days in tax year
–2,Divide daily amount by # of shares
outstanding
–3,Total daily allocations for a share
–4,Multiply amount per share times # of
shares held by owner
–See Example C11-16
15
Loss Limitations
?Ordinary & separately stated loss
amounts,passed” through to s/h
?S/h’s deduction limited to adjusted
basis in stock plus adjusted basis of
debt owed directly by corp to s/h
16
Additional Limitations
?§ 465 at-risk rules applied at s/h
level
?Passive activity rules
–S/h must meet material participation
std,to avoid passive activity limitation
?§ 183,hobby loss” rules apply at s/h
level
17
Family S Corporations
?Donee or purchaser of stock in S
corp not considered a s/h unless
–Such stock acquired in bona fide
transaction AND
–Donee or purchaser is the real owner
of stock
18
Basis Adjustments
(1 of 2)
Initial investment
+ Additional contributions
+ Share of income/separate items
- Distrib’s excluded from s/h gross inc,
- Non-deductible expenses not
chargeable to capital
- Share of losses/distributions
= Ending basis (but not below zero)
19
Basis Adjustments
(2 of 2)
?Basis adjustments to s/h debt
–After stock basis reduced to zero,
basis reduction applies to
indebtedness based on relative
adjusted basis for each loan
20
S Corporation
Distributions (1 of 2)
?Distributions for S Corp w/o AE&P
–Money distributions tax-free and
reduce s/h basis,but not below zero
–When s/h has a zero basis,
distributions received treated as gain
from sale of stock
–Corporation recognizes gain on
distribution of appreciated property
21
S Corporation
Distributions (2 of 2)
?Distributions for S Corp w/ AE&P
–Distributions based on tiers of earnings
?Distributions from AAA are tax-free
?Distributions from AE&P are taxable
?Distributions that reduce basis in S corp
stock are tax-free
?Distributions over stock basis are taxable
–See Table C11-1 and Example C11-27
22
Comments or questions about PowerPoint Slides?
Email Richard Newmark at Dr.Newmark@PhDuh.com
