indirect ownership exceeds 50 percent. Net Operating Loss Carryovers The unused net operating loss carryover is not available to the S corporation except against the built-in gains 34. tax. Only if the corporation returns to C corporation status will the carryover be of value. The return to C status would have to be made before the carryover period expires because the intervening years count as tax years in the carryover time limitation. Treatment of Expenses and Interest Owed to Shareholders S corporation tax items are divided among shareholders on a per-share, per-day basis. The allocation procedure takes 35. into consideration the percent ownership that a shareholder holds and the portion of the year that a shareholder owns the stock. Differentiation in Voting Rights An S corporation may have only one class of stock. However, differences in voting rights are permitted. Both 36. voting and non-voting stock share in S corporation tax items on a per-share, per-day basis. Termination of Shareholder’s Interest Th e per-share, per-day allocation procedure assumes that all events occur evenly throughout the year and allocates 37. gains and losses on that basis. By using the corporation’s permanent records the allocation is made based only on the events that happened during that period. If the corporation received most of its income in the last half of the year, a shareholder selling shares at midyear would receive a larger allocation of net income on the per-share, per-day allocation than would be received on an allocation based on the corporation’s permanent records.
402 CCH Federal Taxation—Comprehensive Topics Chapter 21 © 2012 CCH. All Rights Reserved. Debt and Shareholder’s Basis Shareholder basis becomes important in determining the maximum amount of loss that may be passed through 38. to a shareholder and in determining the taxability of corporate distributions. A shareholder’s basis is limited to the sum of the shareholder’s basis in the stock of the corporation plus the shareholder’s adjusted basis of any debt of the corporation to the shareholder. Other corporate debt does not add to shareholder basis. This treatment differs from partnership taxation where generally each partner is allowed to take a proportionate share of partnership debt in basis determination. Accumulated Earnings and Profits Sources The only two sources of S corporation accumulated earnings and profits are (1) earnings and profits from tax years 39. in which the S election was not in effect and (2) corporate acquisitions which result in a carryover of earnings and profits. Accumulated Adjustments Account Corporations with accumulated earnings and profits may wish to distribute these earnings before making a 40. distribution from the Accumulated Adjustments Account to avoid termination of S corporation status because of incurring excessive passive investment income for three consecutive years or to avoid the passive investment income tax.
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