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CHAPTER 22 S CORPORATIONS LECTURE NOTES INITIAL OBSERVATIONS 1. Tax law changes in the last decade have liberalized the ownership restrictions on S corporations, further reduced the tedious barriers to qualify, and rationalized accounting rules governing the allocation of S corporation items among the shareholders. The most important of these changes include the following. a. Increase the theoretical maximum number of shareholders to 100. b. Allow S corporations to have C and certain S corporation subsidiaries. c. Distributions are applied to stock basis before reductions for current year losses and deductions. d. Family members may elect to be treated as one shareholder, so there can be many more than 100 shareholders. 2. The top personal rate of 35% is now the same as the top corporate rate of 35%, and the capital gain rates were reduced again. INTRODUCTION 3. S Corporation status provides many of the benefits of partnership taxation plus limited liability for the owners similar to a C corporation. Thus, an S corporation is a hybrid of partnerships and C corporations. 4. S corporations are treated as corporations under state legal systems. 5. Since the IRS ruled that a limited liability company (LLC) may be taxed as a partnership, the LLC may become the preferred form of doing business by closely held corporations, and certainly for new businesses. Another alternative is the limited liability partnership 22-1
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22-2 2009 Comprehensive Volume/Instructor’s Guide with Lecture Notes (LLP). See Instructor’s Guide Figure 22-1 (page 22-15). Despite the popularity of LLCs and LLPs, the number of S corporations continues to grow. 6. Due to flexibility in organization and capital structure, LLCs appear to have a slight edge over S corporations in tax considerations. However, with respect to non-tax concerns, S corporations probably are preferable to LLCs, and most existing S corporations will remain S corporations. An Overview of S Corporations 7. S corporation popularity has waxed and waned with the changes in the tax laws. However, S corporations are currently popular with more than 60% of all corporations filing S tax returns. ADDITIONAL LECTURE RESOURCE The Small Business Corporation provision was first introduced in Congress in 1954, but it did not become law until 1958. A Subchapter R option in § 1351 was passed in 1954 to allow a partnership to be taxed as a corporation, but that provision was quickly deleted from the Code. When to Elect S Corporation Status 8. The following factors should be considered when considering electing S status. a. Marginal rates of shareholders. b. Usefulness of pass-through losses to shareholders. c. Effect of S election on C corporation NOL carryovers. d.
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This note was uploaded on 03/17/2009 for the course ACC 483 taught by Professor Susankuniyoshi during the Spring '08 term at University of Phoenix.

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