Chapter 12 - Chapter 12 SCorporations Subchapter S Issues 0...

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Chapter 12 S Corporations Subchapter S Issues 0. S corporations provide many of the benefits of partnership taxation 0. Also gives the owners limited liability protection from creditors 1. S corporation status is obtained through an election by a qualifying corporation with the consent of its shareholders 2. S corporations are still corporations for legal purposes 1. Owners receive the benefits of limited liability, ability to raise capital (within limits), etc... 3. Taxation resembles partnership taxation 2. Certain items (primarily business income and certain expenses) are accumulated and passed through to shareholders 3. Other items are “separately stated” and each item is passed through to shareholders 4. An S corporation is a reporting (rather than tax-paying) entity 5. Tax liability may still arise at the entity level for: 4. Built-in gains tax, or 5. Passive investment income penalty tax 6. An S corporation is not subject to the following taxes: 6. Corporate income tax 7. Accumulated earnings tax 8. Personal holding company tax 9. Corporate alternative minimum tax 7. Entity is subject to Subchapter C rules for a transaction unless Subchapter S provides alternate rules When to Elect S Corp Status 8. Following factors should be considered: 10. If shareholders have high marginal tax rates vs C corp rates 11. If NOLs are anticipated 12. If currently C corp, any NOL carryovers from prior years can’t be used during S corp years 0. Still reduces 20 year carryover period
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13. Character of anticipated flow-through items S Corp Qualification Requirements 9. To elect under Subchapter S, a corporation must meet the following requirements: 14. Must be a domestic corporation 15. Must not otherwise be “ineligible” 0. Ineligible corporations include certain banks, insurance companies and foreign corporations 1. Any domestic corp. that is not an ineligible corp. can be a qualified Subchapter S Subsidiary (QSSS) if: 0. S corp owns 100% of its stock, and 1. Elects to treat the subsidiary as a QSSS 10. Corporation may have only one class of stock 16. Can have stock with differences in voting rights but not in distribution or liquidation rights 17. It is possible for debt to be reclassified as stock 1. Results in unexpected loss of S corp status 2. Safe harbor provisions mitigate concern over reclassification of debt 0. Must have 100 or less shareholders 0. Family members may be treated as one shareholder 1. Shareholders can only include individuals, estates, certain trusts, and certain tax-exempt organizations 1. Partnerships, Corps, LLPs, most LLCs and most IRAs cannot own S corp stock, but S corps can be partners in a partnership or shareholders in a corporation 2. Shareholders cannot include any nonresident aliens Making the Election 11. To become an S corp, must make a valid election that is: 18. Filed timely 19. All shareholders must consent to the election 12. To be effective for current year 20. Make election by 15th day of third month of current tax year, or 21. File in previous year 13. Shareholder Consent 2.
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