S Corporation Income Taxation

Potential pitfalls of state income tax incentives for passthroughs

The benefit of a state income tax credit, if it is earned in a state where the owner is not resident, is often lost.

S corporation shareholder cannot take FICA tip credit

An S corporation shareholder cannot unilaterally change an S corporation’s tax election in order to claim FICA tip credits.

Another look at C corp. vs. S corp. in light of tax reform

In the typical closely held business context, the TCJA’s reduction of corporate tax rates to a flat 21% is far from a panacea.

Sec. 336(e) elections for S corp. targets: Get a step-up without a letter ruling

Individuals, partnerships, or other noncorporate entities that could not benefit from a Sec. 338(h)(10) election may be able to qualify for a Sec. 336(e) election.

3-year holding period applies to S corporations

The IRS announced that S corporations are subject to the new extended three-year holding period applicable to carried interests.

Converting from S corp. to C corp.: Select issues for consideration

As a result of tax reform, which provides for a significant decrease in the corporate tax rate and a more modest decrease in passthrough tax rates, business owners may consider revoking S corporation elections.

Understanding the new Sec. 199A business income deduction

The new deduction allows certain business owners to keep pace with the significant corporate tax cut provided by the Tax Cuts and Jobs Act.

Intercompany transactions do not increase debt basis in S corporation

Loans among related entities were not bona fide indebtedness that would give rise to debt basis in an S corporation for the shareholder.

Longer carried interest holding period includes S corporations

The IRS announced that the new three-year holding period for carried interests applies to S corporations as well as partnerships.

Dispute between shareholders did not strip taxpayers of beneficial rights of ownership

The Tax Court held that the taxpayers’ poor relations with other shareholders of an S corporation did not affect their ownership interest in the corporation.

Tax Court holds microcaptive insurance company was not a bona fide insurer

Tax Court held that amounts passthrough business entities paid to a purported insurance company they owned were not premiums paid for insurance contracts and not deductible.

Items and factors to consider in setting reasonable compensation

All companies should maintain supporting documentation for payments.

IRS will not acquiesce to ruling on non-safe-harbor reverse Sec. 1031 exchange

IRS announced it will not acquiesce to a Tax Court ruling in which it held that a taxpayer’s disposition and acquisition of property was not a self-exchange and qualified for Sec. 1031 nonrecognition treatment.

Lack of economic substance dooms loss deductions

A taxpayer was not entitled to a passthrough loss from the dissolution of an S corporation because the dissolution was part of a tax structure that did not have economic substance.

Current developments in S corporations

The AICPA S Corporation Taxation Technical Resource Panel offers a summary of recent court decisions and IRS guidance.

Using qualified Subchapter S trusts (QSSTs)

The QSST may be useful for estate planning purposes and for holding S stock for the benefit of a minor or incompetent.

Structuring loans for S corp. shareholder basis planning opportunities

An understanding of S corporation basis rules enables practitioners to assist clients in taking advantage of planning opportunities aimed at maximizing deductible passthrough losses.

Liability for payment of employment taxes when using a PEO

Chief Counsel Advice was issued regarding who is ultimately liable for payment of employment taxes when using a professional employment organization.

Tax Court allows full meal deduction for NHL team’s away games

Pregame meals provided to Boston Bruins players and personnel before away games qualify as a de minimis fringe benefit.

Allocating S corp. losses to acquiring and terminating shareholders

An S corporation’s election to use specific accounting can alter the allocation of passthrough items in some cases.
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