9550 S EASTERN AVE., STE 253
LAS VEGAS , NV 89123
702-952-9595
WWW.FMSNEVADA.COM
info@fmsnevada.com
LAS VEGAS , NV 89123
702-952-9595
WWW.FMSNEVADA.COM
info@fmsnevada.com
Before the popularity of the LLC, this was the form of choice for many small companies. But unlike an LLC, you can’t distribute profits unevenly.
You must pay corporate fees as well. FMS lawyers and accountants can help you through the process.
You must pay corporate fees as well. FMS lawyers and accountants can help you through the process.
The provisions of Subchapter S allow the shareholders of eligible “small business corporations” to be taxed on corporate earnings and deduct corporate losses directly, in a manner that resembles the taxation of partners. As the following discussion demonstrates, however, there are significant differences between the taxation of partners and Subchapter S shareholders, and these differences substantially undermine the tax neutrality Congress sought to foster through the enactment of Subchapter S. Indeed, because of the deficiencies of Subchapter S in comparison to Subchapter K and the ability of LLCs to be classified as partnerships, there is rarely a reason to create a corporation with the intention of electing to be taxed under Subchapter S. Accordingly, the principal utility of Subchapter S is to provide a pass-through tax alternative to existing corporations that cannot switch to the partnership regime without engaging in a taxable liquidation.
For most purposes, S corporations are not separate taxable entities: They are not taxable on their ordinary income, and they are generally not taxable on capital gain income. Instead, persons owning stock in an S corporation are taxed on its undistributed income or loss for the year. Moreover, items of income and loss generally retain their character on the shareholder’s return.
A shareholder’s basis in an S corporation’s stock is increased by his share of the corporation’s income, and decreased by his share of the corporation’s loss. A shareholder can deduct his share of an S corporation’s loss, however, only to the extent of the combined basis of his stock and any indebtedness of the corporation that he holds. Significantly, unlike Subchapter K, which provides for the inclusion of partnership liabilities in partners’ bases, the Subchapter S rules do not permit an S corporation shareholder to add any portion of the corporation’s liabilities to his stock basis. If a shareholder’s share of S corporation losses exceeds his basis, the excess losses may be carried over indefinitely and deducted when and if the shareholder acquires additional basis.
Distributions of money from an S corporation to a shareholder, to the extent the corporation has no Subchapter C earnings or profits, are treated in a manner similar to distributions from a partnership to a partner. In general, the shareholder is entitled to recover, tax-free, his combined basis in his stock and debt, and gain is triggered only to the extent the distribution exceeds this basis. Unlike property distributions by partnerships, distributions of appreciated property by S corporations trigger taxation at the corporate level.
For most purposes, S corporations are not separate taxable entities: They are not taxable on their ordinary income, and they are generally not taxable on capital gain income. Instead, persons owning stock in an S corporation are taxed on its undistributed income or loss for the year. Moreover, items of income and loss generally retain their character on the shareholder’s return.
A shareholder’s basis in an S corporation’s stock is increased by his share of the corporation’s income, and decreased by his share of the corporation’s loss. A shareholder can deduct his share of an S corporation’s loss, however, only to the extent of the combined basis of his stock and any indebtedness of the corporation that he holds. Significantly, unlike Subchapter K, which provides for the inclusion of partnership liabilities in partners’ bases, the Subchapter S rules do not permit an S corporation shareholder to add any portion of the corporation’s liabilities to his stock basis. If a shareholder’s share of S corporation losses exceeds his basis, the excess losses may be carried over indefinitely and deducted when and if the shareholder acquires additional basis.
Distributions of money from an S corporation to a shareholder, to the extent the corporation has no Subchapter C earnings or profits, are treated in a manner similar to distributions from a partnership to a partner. In general, the shareholder is entitled to recover, tax-free, his combined basis in his stock and debt, and gain is triggered only to the extent the distribution exceeds this basis. Unlike property distributions by partnerships, distributions of appreciated property by S corporations trigger taxation at the corporate level.
If an S corporation has accumulated earnings and profits from a period during which it was a C corporation, the tax scheme is more complex. In general, distributions are tax-free to the shareholder, but only to the extent of the post-1982 net income of the S corporation not previously distributed.
To qualify to elect Subchapter S treatment, a corporation must not be a member of an “affiliated” group of corporations, must have only one class of stock outstanding, all shares of which must be held by no more than seventy-five shareholders, all of whom must be individuals, certain types of trusts, or estates, and none of whom may be nonresident aliens. Each shareholder must consent to the corporation’s election to be subject to Subchapter S.
If a corporation has had a Subchapter S election in effect throughout its existence, no restrictions on passive investment income are applicable. If, however, the corporation was ever a C corporation and has Subchapter C accumulated earnings and profits, more elaborate rules come into play.
In summary, while S corporations and partnerships are subject to generally similar tax rules, there are significant differences. One significant difference is that, unlike partners in a partnership, shareholders in an S corporation are not permitted to include any entity-level liabilities in their bases. Another significant difference is that property distributions by S corporations are corporate-level recognition events under Code Sections 311 and 336, while property distributions by partnerships do not generally trigger partnership-level recognition.
The qualifications for S corporation treatment are strict. An S corporation can have no more than thirty-five owners, and they must be individuals who are not nonresident aliens; corporations and partnerships cannot be shareholders. As importantly, Subchapter S applies only if the owners own capital and share profits and losses ratably. Thus, the availability and flexibility of Subchapter S treatment is severely limited.
To qualify to elect Subchapter S treatment, a corporation must not be a member of an “affiliated” group of corporations, must have only one class of stock outstanding, all shares of which must be held by no more than seventy-five shareholders, all of whom must be individuals, certain types of trusts, or estates, and none of whom may be nonresident aliens. Each shareholder must consent to the corporation’s election to be subject to Subchapter S.
If a corporation has had a Subchapter S election in effect throughout its existence, no restrictions on passive investment income are applicable. If, however, the corporation was ever a C corporation and has Subchapter C accumulated earnings and profits, more elaborate rules come into play.
In summary, while S corporations and partnerships are subject to generally similar tax rules, there are significant differences. One significant difference is that, unlike partners in a partnership, shareholders in an S corporation are not permitted to include any entity-level liabilities in their bases. Another significant difference is that property distributions by S corporations are corporate-level recognition events under Code Sections 311 and 336, while property distributions by partnerships do not generally trigger partnership-level recognition.
The qualifications for S corporation treatment are strict. An S corporation can have no more than thirty-five owners, and they must be individuals who are not nonresident aliens; corporations and partnerships cannot be shareholders. As importantly, Subchapter S applies only if the owners own capital and share profits and losses ratably. Thus, the availability and flexibility of Subchapter S treatment is severely limited.
9550 S EASTERN AVE., STE 253
LAS VEGAS , NV 89123
702-952-9595
WWW.FMSNEVADA.COM
info@fmsnevada.com
LAS VEGAS , NV 89123
702-952-9595
WWW.FMSNEVADA.COM
info@fmsnevada.com
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