S corporations - tax model
computation: code sec. 702(a)(8) is generally operating income or loss computed as follows:
- Ordinary Income "From Whatever Source Derived" (including Code Sec. 1245 recapture)
- Less: Exclusions
- Less: Cost of Goods Sold (resulting in gross income from
separately stated items
- Each shareholder of an S corporation reports his or her share of corporate net income based on stock ownership
- Any income, loss, deduction, or credit which could uniquely affect the tax liability of a shareholder is separately stated in the K-1 to the
separately stated items examples
- Passive income and losses from rental and other non-operating activities
- Investment income and related expenses (e.g., dividends, investment interest, ad valorem tax on stock, investment counseling fees, etc.)
- Code Sec. 1231 gain and loss
- Capital
the conduit concept
- For most tax matters, S corporations are treated like partnerships
- Taxable income of an S corporation flows through to the owners on a per-day and per-share basis
- Income and losses are reported on Form 1120-S, allocated to each shareholder on a supp
the entity concept
- The character of income and losses is determined at the entity level, not at the shareholder level
- For example, a long-term capital gain reported by the S corporation remains long-term to the shareholder, even if his ownership in the S corporation had
distributions of cash or property
Actual distributions of cash or property are generally not income to its shareholders
2 differences with partnerships
- Owner salaries and payroll taxes: Deductible by S corporations, not by partnerships
- Gain on distribution of property: S Corps must recognize gains (but not losses) on distributions of appreciated property to shareholders; partnerships escape this gain
nontax matters
- For most structural matters (e.g., formation, redemptions and terminations), S corporations are treated in much the same manner as C corporations
S Corporation - Eligibility and Election
- A corporation is treated as an S corporation only for those days for which each specific eligibility requirement is met and the required election is effective
- rules include: Unanimous consent and deadline for filing S election
unanimous consent
100% of shareholders must consent to the S election
deadline for filing S election
- if a calendar year C corporation makes an S election by 3/15/x1, it is retroactive to 1/1/x1
- If made after 3/15/x1, but before 3/15/x2, it is effective 1/1/x2
one class of stock
- Only one class of stock is permitted
- Rights to profits and assets on liquidation must be identical
- Debt may be treated as a disqualifying second class of stock
maximum 100 shareholders
- The number of shareholders may not exceed 100
- A nonresident alien may not own shares
- Each shareholder must be an individual, an estate, or a qualified trust
- Related taxpayers count as one taxpayer
ineligible corporations
- must be domestic corporation
- not a bank or insurance company
eligible subsidiaries
- S corporations can own C corporations, but C corporations cannot own S corporations
- S corporations can own qualified subchapter S subsidiaries (QSub)
-- A QSub is an electing domestic corporation that qualifies as an S corporation and is 100% owned by
S election will be revoked if one of the following events occurs
- over 50% consent: over 50% of SH agree to revocation
-- deadline for revoking is same as deadline for electing
- prior C life AND passive investment over 25%: If S corp had a prior life as a C corporation and its passive investment income is over 25% of
S election will be terminated if one of the following events occurs
- violation of qualifications: if any of the qualifications mentioned above are violated the S is terminated on date of violation
- majority shareholder revocation: if a new shareholder owning more than 50% takes affirmative action to terminate the electi
after revocation or termination
a new election cannot be effectively made for 5 years without IRS consent
S Corp Tax year
- must generally use a calendar year end
- may elect a fiscal tax year if 3 month deferral OK
three month deferral
A fiscal tax year would result in income deferral of not more than three months and the shareholder-employee's salary earned between fiscal year end and December 31 is both:
- Paid during that period AND
- Proportionate to the salary paid during the prece
S corp Accounting Methods
- The accrual, cash and hybrid methods are available regardless of the size of the S corporation