2009 CCH. All Rights Reserved.
SUMMARY OF CHAPTER
The Subchapter S rules of the Internal Revenue Code have undergone signi
cant changes since they were
rst introduced in 1958. Corporations qualifying under the rules basically have not been taxed except possibly
on built-in capital gains and excessive passive income. However, originally the S corporation had signi
characteristics of both the corporation and the partnership. With the Subchapter S Revision Act of 1982, qualifying
S corporations are now treated more like partnerships and have just a few corporate characteristics. The main
revision instituted by the 1982 Act was that items of income, gain, expense, and loss now pass through to the
shareholders while retaining the same characteristic as if received by the corporation. Prior to the change, only long-
term capital gains could retain their status when passed through to the shareholders.
Selecting the Subchapter S Form
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.
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.
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 preelection 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
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 early disposition of property on which
general business credit was claimed by the corporation when it was a C corporation.