S Corporation Income Taxation

Bridging the gap: GILTI and AAA

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 built-in gains tax

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.

Partnerships and S corps. can deduct state and local taxes

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.

Private equity and F reorganizations involving S corporations

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.

Making a new S election after termination

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.

Current developments in S corporations

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.

Electing S status by an LLC

A limited liability company can elect to be classified as a corporation and elect S status by following the procedures discussed here.

Deducting losses after an S corporation terminates

A special relief provision allows unused losses caused by a lack of basis to be deducted by an S corporation shareholder under certain conditions for one year (or more) during the S corporation’s post-termination transition period.

Distribution by former S corporation is part dividend

The IRS ruled that a distribution to the sole shareholder of a C corporation was partly a recovery of the former S corporation’s accumulated adjustments account (AAA) and a taxable dividend for the remaining distribution.

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