chapter_12_notes - 12-1 Chapter 12 S Corporations(2011...

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12-1 Chapter 12 S Corporations (2011 edition) updated: February 23, 2011 Learning Objectives: Explain the requirements for being taxed under Subchapter S Calculate ordinary S corporation income or loss Determine the separately stated items Calculate shareholder’s allocable share of ordinary income/loss and separately stated items Understand the limitations on a shareholder’s deduction of S corporation losses Calculate a shareholder’s basis in S corporation stock and debt Determine the tax consequences of S corporation’s distributions to shareholders Calculate amount of any special S corporation tax levies I. Tax Consequences Associated with the S-Corporation Election A. S corporations are still corporations for legal purposes – owners receive the benefits of limited liability. B. S corporations account for more than 60% of all corporate tax returns. C. Are a tax-reporting entity (Form 1120S and Schedule K), rather than tax- paying entity (with some exceptions). Note: Items B & C help explain the claim often made in the press and by politicians that “most (evil) corporations don’t pay tax”. D. S corporation status is elective – failure to make the election in the manner prescribed results in the entity being taxed as a C corporation E. The taxation of S-corporation operations resembles a partnership 1. certain items (primarily business income and certain expenses) are accumulated and passed through to shareholders 2. other items are “separately stated” and each item is passed through to shareholders (retain their character) 3. notable differences special allocations are not allowed ordinary S corporation income is not subject to self-employment tax pre-contribution gains are not allocated to contributing shareholder most S corporation debt does not affect shareholder basis (which may affect the deductibility of flow-thru losses)
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12-2 F. However, in most other areas S-corporations are taxed similar to C corporations 1. Sec. 351 applies to the contribution of property into an S-corporation 2. S-corporations must recognized gain (but not losses) on the distribution of appreciated property (“as if” sold at fair value); usually a separately stated item that is passed thru to the shareholders 3. most liabilities are ignored in the computation of basis 4. the liquidation of an S-corporation follows the C-corporation rules G. An income tax liability may still arise at the entity level (S corporation level) for 1. the built-in gains tax, or 2. the passive investment income penalty tax, or 3. LIFO recapture tax Note: All three taxes result from the entity being taxed previously as a C corporation. H. Recent developments – 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.
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chapter_12_notes - 12-1 Chapter 12 S Corporations(2011...

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