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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 corporations2

S Corporations

In General

s corporations3
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)
multiple entity structures
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
accounting periods
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)]
accounting periods6
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]
accounting periods7
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 corporations8

S Corporations

Allocations

allocations
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)]
state income taxes
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)]
elections
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
prorata share
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)]
allocations13
Allocations
  • See Example 1: Questions 1, 2, 3, & 4
s corporations14

S Corporations

Basis in S Corporation Stock

beginning basis
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
basis adjustments
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 (-)
s corporation stock basis
S Corporation Stock Basis
  • See Example 1: Questions 5 & 6