S Corporation Income Taxation

Current Developments in S Corporations

This article discusses major changes and developments that directly affect S corporations and their tax advisers during the period of this update (July 10, 2012–July 9, 2013).

Sec. 179 Deduction Limitation Applied to S Corps. in a Controlled Group

The IRS recently released an information letter to clarify the treatment of the Sec. 179 limitations applied to members of a controlled group, in which certain members had made an election to be treated as an S corporation.

Chief Counsel Disregards Indemnification Agreements Under Anti-Abuse Rules in Transactions That Result in Disguised Sales

The Office of Chief Counsel advised that an indemnification agreement should be disregarded and, accordingly, the underlying partner contribution and distribution should be treated as a disguised sale.

Debt and Proving Basis in Flowthrough Entities

A taxpayer’s basis is often scrutinized by the IRS, particularly when basis is claimed based upon debts incurred by a flowthrough entity.

Revenue Procedure Provides Liberal Relief for Late S Corp. Elections

The IRS provided a simplified method for taxpayers to apply for relief for various late S elections

2012 Best Article Award

Winners of The Tax Adviser’s 2012 Best Article Award.

Understanding the Tax Consequences of S Corporation Redemptions to a Shareholder

While an analysis of the tax consequences of a redemption to the shareholder usually begins with whether the transaction qualifies for sale or exchange treatment, another starting point is whether the S corporation has accumulated earnings and profits.

QSub Status Is Not Property of Bankruptcy Estate

An S corporation’s revocation of its S corporation status, which caused its QSub subsidiary to lose its status as a QSub, was not a post-bankruptcy-petition transfer of property of the QSub’s bankruptcy estate.

QSub Election Does Not Increase Shareholder Stock Basis

The Tax Court held that shareholders of an S corporation improperly increased the adjusted basis of their S corporation stock when the S corporation made a QSub election for its wholly owned C corporation subsidiary.

Final Rules on Acceleration of COD Income Deferral Are Issued

The IRS issued final regulations on the rules to accelerate COD income that taxpayers elected to defer over a five-year period when an applicable debt instrument was reacquired by the issuer or a related party in 2009 or 2010.

LIFO Inventory Considerations When Making a C-to-S Conversion

A taxpayer valuing its inventory under the last-in, first-out (LIFO) method should consider two significant implications for taxable income when converting from a C corporation to an S corporation.

Check-the-Box: A Trap for the Unwary

It has never been easier to effect the choice of operating as a sole proprietorship, partnership, or corporation for federal income tax purposes; however, sometimes unforeseen problems can result.

Deducting S Corporation Losses to Extent of Shareholder Basis

An S corporation shareholder reports corporate income or loss on the personal income tax return for the year in which the corporate year ends; losses or deductions passed through to the shareholder first reduce stock basis, then loss amounts are applied against debt basis.

IRS Not Allowed to Reclassify Passive Activity Income

The Tax Court held the IRS could not reclassify the taxpayer’s income from the rental of cellphone towers and the land they were situated on to his wholly owned S corporation as nonpassive income under the self-rental rule. 

Debt Discharge Under Sec. 108: Partnerships vs. S Corps.

As tax liability for COD income gives many taxpayers an unpleasant surprise in today’s economy, its tax treatment continues to be a focal point for tax professionals in tax planning and preparation.

Providing Sec. 132 Fringe Benefits to S Corporation Employees

S corporations can offer employees the same fringe benefits as other business entities; however, so-called 2% shareholders are treated as partners for fringe benefit purposes. Work related fringe benefits are an exception.

Measuring Insolvency Under Sec. 108

While determining if a taxpayer is bankrupt is straightforward, determining whether a taxpayer is insolvent can be tricky.

Inadvertent S Corp. Terminations

When an S election is made, requirements must be met to avoid an inadvertent termination of S status.

Planning for Redemptions of S Corporation Stock Using Contingent Payments

When shareholders of an S corporation choose to part ways, they often do so by redeeming a departing shareholder’s stock.

How Changes in Corporate Tax Rate Can Affect Choice of C vs. S Corp.

This item examines the effect of the proposed lower corporate tax rates in an analysis of the tax results of converting an S corporation to a C corporation.
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