Chapter
11
S Corporations
S Corporations
In General
Slide 7-3
S Corporations
[IRC §1363(a)] For federal income tax
purposes, S corporations are tax reporting
entities but not tax paying entities (except as
otherwise provided)
Separate return filed (Form 1120S)
Reporting to owners (Schedule K-1)
Slide 7-4
Multiple Entity Structures
[IRC §1504(b)(8)] S corporations owning stock
of a C corporation cannot file a consolidated
return with the C corporation
[IRC §1361(b)(3)] If an S corporation owns
100% of the stock of a Qualifying Subchapter S
Subsidiary (QSSS) and makes an election, the
two corporations are treated as one entity
Slide 7-5
Accounting Periods
Shareholders report their flow-through items
from the S corporation in their taxable year
within which the corporation’s tax year ends
[IRC §1366(a)]
Slide 7-6
Accounting Periods
S corporation’s generally must use a calendar
(December 31) year-end unless can establish a
business purpose, to the satisfaction of the IRS,
for a different year-end [IRC §1378]
Slide 7-7
Accounting Periods
S Corporations an elect a fiscal year-end other
than the required fiscal year-end if:
 Deferral period is 3 months or less
[IRC §444(a) and (b)(1)]
Non-interest bearing deposit is maintained with the
IRS [IRC §444(c)(1)]
Deposit essentially equals the highest individual tax rate
times the deferral ratio (deferral months/months in tax
year) times net income shareholders are subject to tax on
[IRC §7519]
S Corporations
Allocations
Slide 7-9
Allocations
[IRC §1366(a)] S corporations’ income, losses,
etc. flow through to shareholders
Any items that may affect different taxpayers
differently are reported as separately stated items
[IRC §1363(b)(1) and IRC §1366(a)(1)(A)]
Items that do not affect different taxpayers
differently are combined and reported as one item
[IRC §1366(a)(1)(B) & (a)(2)]
Character of items is determined as if directly
realized by the shareholder [IRC §1366(b)]
Slide 7-10
State Income Taxes
For state income tax, S corporations are taxed in
the same manner as any other corporation (rather
than as a flow through entity) in many states
Taxes paid to states are separately stated items
[IRC §1366(a)(1) and IRC §702(a)(6)]
Slide 7-11
Elections
[IRC §1363(c)] The corporation makes any
elections that affect computations of separately
stated items or nonseparately stated income or
loss except for:
Election to deduct certain mining exploration costs
rather than using units of production method
Election to take a foreign tax credit rather than
deducting income taxes paid to foreign countries
Slide 7-12
Prorata Share
[IRC §1366(a)(1)] S corporation shareholders
take into account their “prorata share” of all the
corporations’ separately stated items and its
nonseparately stated income or loss
Prorata share is determined based on days and
shares outstanding [IRC §1377(a)(1)]
Slide 7-13
Allocations
See Example 1: Questions 1, 2, 3, & 4
S Corporations
Basis in S Corporation Stock
Slide 7-15
Beginning Basis
[IRC §1012] Beginning basis in stock acquired
by purchase or in a taxable exchange is its cost
[IRC §358(a)(1)] Beginning basis in stock
acquired in an IRC §351 transactions equals:
 The basis of assets given up
 Plus gain recognized on the exchange
 Less the FMV of boot received
Slide 7-16
Basis Adjustments
[IRC §1367(a)] Basis is adjusted each year for:
Pro rata share of S corporation’s separately stated
items and nonseparately stated income or loss (+/-)
Pro rata share of S corporation’s expenses not
deductible in computing taxable income and not
chargeable to capital account (-)
Pro rata share of cash distributions made by the
corporation that are not includible in income by
reason of IRC §1368 (-)
Slide 7-17
S Corporation Stock Basis
See Example 1: Questions 5 & 6