Leadership
By: Bred • Essay • 1,143 Words • May 13, 2010 • 1,006 Views
Leadership
May 3, 2007
Flow-Through
- Taxation at S Corp Level
- Taxation at Shareholder Level
Shareholder Basis
- Stock Basis
- Indebtedness Basis
Flow-Through
Taxation at S Corp Level
Subsection 1363(a)- S Corp is generally not subject to income tax
Subject to:
- Employment tax
- Excise tax
Exceptions to Income tax Rule 1363(a)
1. Passive Income
2. Built in Gains
Passive Income
- S Corp that has subchapter C earnings and profit
- S Corp with passive income
o Gross receipts exceed 25 percent of passive activity (pay income tax)
o Gross receipts exceeds 25 percent for 3 years (S Corp termination)
Built in Gains
- Conversion from C Corp to an S Corp
- Any appreciated assets as date of conversion are called Net Built in Gain
o Within 10 years if you sell assets you are subject to tax
Subsection 1363(b)- S Corporations taxable income is calculated in the same manner as an individual
Exceptions to 1363(b):
- Personal Exemptions under Section 152 are not deductible
- Charitable Contributions under Section 170 are not deductible
- Any additional itemized deductions (medical)
Taxation at Shareholder Level
Subsection 1366(a)- all items of income, deduction, loss, and credit recognition by S Corp are passed through to the shareholder
Knott v. Commissioner TC Memo 1991-352
- Shareholders are taxed on their allowable share of income even if not distributed
Subsection 1366(b)- Character of any item included in a shareholder pro-rata shares shall be determined as if it we realized directly from the source and incurred in the same manner as a corporation
Exceptions to 1366:
- Regulation 1.1366-1(b)(2)- if S Corp that is formed for a principle purpose of selling or exchanging contributed property that in the hands of the contributor would not be a capital gain, then the gain on the sale of the property is not capital gain (Purpose to avoid regular income tax obligations)
- Regulation 1.1366-1(b)(3)- for the contributing shareholder it is capital loss and for the S Corp it is ordinary loss to the extent that the capital loss existed at the time of contribution
Shareholders Gross Income
- Includes shareholders pro-rata share of S Corp gross income
Pro-rata- Subsection 1377(a)
- Each shareholder pro-rata share of any item for any taxable year shall be the sum of the amounts determined
o Assigning equal portion of each item to each day
o Divide pro-rata among shareholders
Example in Notebook
Separately Stated Items of Income
Subsection 1361(a)(1)(A)- all items of income (tax exempt) income, deduction, or credit that could effect the liability of the shareholder need to be separately stated
Separate items include:
- Capital gains and losses
- 1231 gains and losses
- Dividend income
- Interest income
- Investment Interest Expense
- Passive Activity items
- Tax Exempt Income and Expenses
- Foreign