lecture9 - Week Nine S Corporations Selecting the...

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Week Nine S Corporations Selecting the Subchapter S Form ¶21,001 Introduction In an S corporation, the corporation in general will pay no tax, whereas the shareholders must include in gross income their proportionate share of corporate income whether or not the corporate earnings are distributed to them. The S election affects only the federal income tax consequences of the electing corporation. ¶21,009 Eligibility To qualify as an S corporation, a corporation must be a small business corporation and meet the following requirements: (1) must be a domestic corporation, (2) must have no more than 100 shareholders, (3) must include only eligible shareholders, (4) must have only one class of stock, and (5) must not be an ineligible corporation. ¶21,077 Election S corporation status must be elected by all of the shareholders of the corporation. The corporation must meet all the eligibility requirements (including shareholder eligibility requirements) for the pre-election portion of the tax year. ¶21,085 Contributions to the Corporation S corporations are under the same rules as a regular C corporation when it comes to contributions to the corporation being free from tax. The three requirements of Section 351 must be met. Boot received is income to the extent of the gain realized. ¶21,105 Tax Year of the Corporation The tax year of an S corporation is required to be either a year ending December 31, or any other tax year for which it established a business purpose to the satisfaction of the Internal Revenue Service. The S corporation that elects to use a tax year other than the required tax year must generally make a “required payment for any tax year for which such an election is in effect. S Corporation Taxation ¶21,147 Introduction An S corporation is not subject to the corporate tax, except for a tax on built-in gains, a tax on excessive passive investment income, LIFO recapture tax, and a tax imposed on
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early disposition of property on which general business credit was claimed by the corporation when it was a C corporation. ¶21,155 Tax on Built-in Gains A tax is imposed on an S corporation that has recognized built-in gain in order to prevent the avoidance of tax through the conversion of a C corporation to an S corporation. The amount of the tax is computed by applying the corporate rate to the net recognized built- in gain. The amount of the net recognized built-in gain taken into account for any tax year cannot exceed the difference of the net unrealized built-in gain over the net recognized built-in gain for prior tax years. ¶21,161 Tax on LIFO Recapture Any C corporation using the LIFO method that converts to S corporation status is required to recapture the excess of the FIFO inventory value over the LIFO value as of the close of the last year as a C corporation. The tax attributable to the LIFO inclusion in income is payable in four installments. ¶21,163 Tax on Passive Investment Income
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lecture9 - Week Nine S Corporations Selecting the...

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