S Corporations

1
S Corporations
11
Chapter
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 corporations tax year ends IRC
  1366(a)

6
Accounting Periods

• S corporations 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 onIRC 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
  itemsIRC 1366(a)(1) and IRC 702(a)(6)

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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

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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

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Basis Adjustments

• IRC 1367(a) Basis is adjusted each year for
• Pro rata share of S corporations separately
  stated items and nonseparately stated income or
  loss (/-)
• Pro rata share of S corporations 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 (-)

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S Corporation Stock Basis

• See Example 1 Questions 5 6