ch12tax1 - Taxation of Business Entities Chapter12...

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Chapter 12 S Corporations Taxation of Business Entities
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C12 - 2 Outline S Corporation Overview S Corporation Requirements S Corporation Election Loss of S Corporation Status S Corporation Operating Rules Allocation of S Corporation Income/Expense/Losses to Shareholders
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C12 - 3 Subchapter S Issues S Corporation status is elective. Failure to make the election in the manner prescribed results in the entity being taxed as a C Corporation. S Corporations are still corporations for legal purposes. Owners receive the benefits of limited liability, ability to raise capital (within limits), etc.
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C12 - 4 Subchapter S Taxation Process Taxation resembles partnership taxation . Business income and related expenses are accumulated and passed through to shareholders as “ordinary income”. Other items are “separately stated” and each item is passed through to shareholders. An S corporation is a reporting (rather than tax- paying) entity. Tax liability may still arise at the entity level for: Built-in gains tax, or Passive investment income penalty tax
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C12 - 5 When To Elect S Corp Status Following factors should be considered: Shareholders’ marginal tax rates vs. C Corp rates. If NOLs are anticipated. If currently C corp, any NOL carryovers from prior years can’t be used during S corp years. Still reduces 20 year carryover period. Character of anticipated flow-through items. Desired use of accumulated profits.
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C12 - 6 S Corp Qualification Requirements To elect under Subchapter S, a corporation must meet the following requirements: Must be a domestic corporation Although unincorporated entities that are eligible to “check the box” to be a corporation may also make an S
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ch12tax1 - Taxation of Business Entities Chapter12...

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