S Corporation Income Taxation

Current Developments in S Corporations (Part I)

This article discusses recent legislation, cases, rulings, regulations, and other developments in the S corporation area for the period July 9, 2009–July 9, 2010. This part focuses on various S corporation operating provisions.

QSubs Included in Definition of S Corp. for Purposes of Sec. 291(a)(3)

In Vainisi, the Seventh Circuit reversed a decision in which the Tax Court held that the 20% interest expense reduction imposed by Sec. 291(a)(3) would apply to a qualified subchapter S subsidiary (QSub) bank even for its tax years following the third year after it converted from C corporation to S corporation status.

S Corporations: Facing the 15% Sunset

One change with major implications for S corporations with prior C corporation earnings is the sunset of the 15% tax rate on qualified dividends. This favorable rate is due to expire on December 31, 2010.

Planning to Escape the S Corporation Built-in Gains Tax in 2010

The American Recovery and Reinvestment Act of 2009 suspended imposition of the built-in gains (BIG) tax for tax years beginning in 2009 and 2010 for qualifying S corporations.

Sec. 465 Traps for the Unsuspecting S Corporation Shareholder

Without proper planning, the at-risk rules set out in Sec. 465 can limit the amount of deductible S corporation losses.

The Story of Basis

Basis is a beneficial concept for a taxpayer—it shields the taxpayer from tax on the sale of an asset and can produce losses that reduce tax liability. It has been described as a “summary of the tax impact of [past] events” that have affected an asset. Nevertheless, basis can be elusive: It can appear or disappear when we are not paying attention. It can cling to an asset, be adjusted up or down, replicate itself, or shift to another asset. In other words, the summary that basis provides can have a number of potential twists and turns.

S Corp. Shareholder Basis for Circular or Certain Back-to-Back Loans

Practitioners advising on proper methods to use for shareholders to acquire basis in loans made to S corporations incurring losses can take away several points from recent court decisions.

S Corporation Basis Reductions for Nondeductible Expenses

When an S corporation has losses and deductions in excess of basis, some of which are nondeductible, noncapital expenses, will there be a carryover of the nondeductible items for purposes of reducing basis in a future year?

Consequences of S Corporation Termination in a Reorganization

An S corporation can participate as a corporate entity in a corporate reorganization; this leads to a substantive advantage of S corporations over partnerships

Final Regs. Issued on S Corp. DOI Income Exclusion and Tax Attributes

The IRS issued final regulations governing how an S corporation reduces its tax attributes under Sec. 108(b) when the S corporation has discharge of indebtedness income that is excluded from gross income under Sec. 108(a).

C Corporations as S Corporation Subsidiaries

An S corporation can elect to treat a 100% owned subsidiary as a qualified subchapter S subsidiary (QSub), which causes the subsidiary to be disregarded for most federal tax purposes. The subsidiary must be a corporation that would be eligible to be an S corporation if the shareholders of its parent S corporation held its stock directly.

Recognizing When an S Corporation Has Accumulated Earnings and Profits

Both a C corporation and an S corporation can distribute taxable dividends to the extent that the corporation has accumulated earnings and profits (AE&P). An S corporation cannot generate earnings and profits (E&P) but a C corporation’s AE&P transfers to the S corporation when the S election is made.

Recapture of Sec. 179 Expense Deduction for Passthrough Entities

How to report the recapture of Sec. 179 expense for passthrough entities at both the entity and owner levels.

Current Developments in S Corporations (Part II)

This article discusses S corporation eligibility, elections, and termination issues. It covers significant topics related to a second class of stock, trusts owning S corporation stock, and an interesting ruling on the reelection of S status.

Current Developments in S Corporations (Part I)

This two-part article discusses recent legislation, cases, rulings, regulations, and other developments in the S corporation area. Part I covers operational issues; part II, in the November issue, will cover S corporation eligibility, elections, and termination issues.

Avoiding S Corporation Debt Obligations That Are a Second Class of Stock

Under certain circumstances, debt owed by an S corporation to one or more shareholders will be a second class of stock.

Revenue Ruling on S Elections for Partnerships Converting to Corporations

The IRS has issued a revenue ruling that addresses the question of whether, when a partnership becomes a corporation for federal tax purposes, it is eligible to elect to be taxed as an S corporation in its first tax year.

Recent Amendment to Sec. 1374 Provides Limited Opportunity for S Corps.

An amendment to Sec. 1374(d) provides a temporary exemption from the application of Sec. 1374 to sales of assets in 2009 and 2010, but only for S corporations that meet certain requirements.

Economic Outlay Revisited

Under the economic outlay doctrine, to obtain basis in an S corporation with respect to debt, a shareholder must make an actual economic outlay, the outlay must somehow leave the shareholder poorer in a material sense, and the debt created must run directly between the shareholder and the S corporation.

Distressed S Corporations: Tax Issues Involved in Restructuring

This article highlights tax issues and planning opportunities that may arise relative to a distressed S corporation, its shareholders, and its creditors.
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