This update on recent developments in taxation relating to S corporations includes cases and rulings on eligible terminated S corporations, S corporation income and losses, the one-class-of-stock requirement, and other issues.
S Corporation Income Taxation
Passthrough owners must consider many risks and uncertainties, in addition to political trends on Capitol Hill, before opting into a state-level regime designed to bypass the $10,000 SALT deduction cap created by the TCJA.
Economic benefits from a compensatory split-dollar life insurance arrangement are not property distributions.
Covenants not to compete can protect a company’s interest as long as they are drafted in an appropriate manner, but their 15-year amortization period can cause issues.
When the basis in an S shareholder’s loan to the S corporation has been reduced by passthrough losses, repayment of the loan may be a taxable event.
In a letter dated March 15, the AICPA asked for IRS guidance on how S corporations and partnerships should treat tax-exempt income from PPP loan forgiveness, especially when it occurs during a different tax period.
IRS Notice 2020-69 provided a new entity election that allows an S corporation to compute the deemed inclusions at the entity level, as opposed to at the shareholder level. This item provides background on the new election, illustrates its effects, and highlights opportunities and traps to consider when contemplating the election.
The IRS issued final regulations on ETSCs and distributions of money from those corporations after the post-termination transition period.
The built-in gains tax applies to C corporations that make an S corporation election, and it can be assessed during the five-year period starting with the first tax year for which the S election is effective.
The president and a director of a not-for-profit is not its beneficial owner and cannot be a shareholder of it.
The IRS said it would issue proposed regulations allowing S corporations and partnerships to deduct “specified income tax payments” paid to state and local governments above the line and not as passthrough items for partners and shareholders.
The IRS finalized proposed regulations on eligible terminated S corporations, a new provision enacted under the Tax Cuts and Jobs Act that provided favorable treatment for corporations that wished to terminate their S elections.
The IRS announced that it will issue regulations to allow S corporations with accumulated earnings and profits to elect to have global intangible low-taxed income inclusions increase the S corporation’s accumulated adjustments account.
The M&A market is poised to regain its pre-COVID-19 activity levels as many business owners seek to exit closely held businesses or explore alternatives. One popular transaction that could emerge is Sec. 368(a)(1)(F) reorganizations F reorganizations) of S corporations.
Generally, after a corporation has revoked or terminated an S election, it cannot make an S election for any tax year before its fifth tax year that begins after the first tax year for which the termination was effective, unless the IRS consents to the election.
Foresight of the potential state tax implications of an F reorganization will allow a seller to evaluate the lesser-known hazards.
This annual update on S corporations covers cases, regulations, and IRS rulings that have been issued in the last year, including the rules for eligible terminated S corporations.
A limited liability company can elect to be classified as a corporation and elect S status by following the procedures discussed here.
Review how shareholders would be taxed on the gain from the sale of stock in an S corporation that is not affected by the built-in gains tax.
The TCJA provides a way to avoid the unexpected termination of the S election when certain ESBT situations occur.