elections are addressed at some point after the (See the "no-newcomer" rule discussed under Sec. The effect of FSA 200230030 is to impute a negative basis when an S corporation shareholder has claimed losses in excess of basis and the IRS no longer has the ability to adjust the tax for the year in which the shareholder claimed the losses or deductions. ownership. Westwood, MA. Entering change of ownership for an S corporation (1120S) in Lacerte Deckard had Waterfront reinstated for 2013 but did not seek reinstatement for 2014. S corporations, when compared to other pass-through entities, are relatively user friendly. 3d 1018 (D. Or. Like the Sec. There are two important rules for the PTTP: Before amendment in 2020, Regs. The IRS issued a notice clarifying GILTI inclusions of S corporation shareholders. 7Coronavirus Aid, Relief, and Economic Security Act,P.L. 453(d), realizing a capital gain of $175 million. With respect to preparing returns of S corporations, certain new requirements went into effect for the 2020 tax year (relating to Schedule B-1/K-1 reporting), and others will commence in 2021 (international reporting). 1377(a)(2) election, Sec. Locate the General Information section. GILTI inclusions of S corporation shareholders: Notice 2020-69, issued Sept. 1, 2020, applies to S corporations that hold stock in controlled foreign corporations (CFCs). Although Z had also made an election to be treated as an S corporation, its fractional ownership in the other corporations is not permitted under the S corporation rules, and this resulted in inadvertent terminations of those corporations' S elections. In general, an ETSC is any C corporation (1) that was an S corporation on the day before the date of enactment of the TCJA and revoked its S corporation election in the two-year period beginning on the date of enactment; and (2) the owners of the stock of which (determined on the date on which such revocation is made) were the same as, and those owners held the stock in the same proportions as, on the date of enactment. However, if the change of ownership takes place in the middle of the tax year, taxing an S corporation becomes much more difficult. Any specified income tax payment made by a partnership or an S corporation during a tax year does not constitute an item of deduction that a partner or an S corporation shareholder takes into account separately under Sec. Sec. 2021-20 that fiscal-year taxpayers who filed a 2020 return on or before Dec. 27, 2020, can deduct eligible expenses on their 2021 return, rather than filing an amended 2020 return. If there is a property distribution, the units examine the proper recognition of corporate-level gain; the character of the gain; the proper distribution amount in a bargain sale; and whether a transfer is subject to the built-in gains tax. a Sec. shareholders, and only those shareholders, who still have Dont get lost in the fog of legislative changes, developing tax issues, and newly evolving tax planning strategies. 1367(a)(2) stating that basis cannot be negative at the end of any period, the government opinion in the FSA states that basis in an open period can be reduced by "recalculations" involving losses in excess of basis erroneously deducted in a closed period. The Tax Court held the NOL deductions were properly disallowed, finding that the proceeds of the Oregon parcels held by the liquidating trusts were applied to discharge certain liabilities of the S corporation and its wholly owned LLC between 2010 and 2012, and the S corporation and the LLC were the owners of the corresponding liquidating trusts during those years under the "grantor trust" provisions of Secs. Regs. 1.1400Z2(b)-1(c)(7)(iv), which became effective in March 2020, addresses an S corporation operating a mixed-funds investment in a QOF. taxable income is $2,700. 83. Between 2010 and 2012, the liquidating trusts disposed of the parcels, and the mortgage holders applied the proceeds from these dispositions against the outstanding liabilities of the S corporation and its wholly owned LLC. it is likely that each party will examine the situation as Important Considerations for Shareholders of S Corporations Undergoing S corporations are subject to special limitations on the number and type of shareholders. The AICPA has submitted comments respectfully requesting Treasury and IRS to: The issue of GILTI lookthrough extends beyond S corporations with AE&P. 1362 describes the procedures for electing or revoking S corporation status. 265(a)(1), which disallows a deduction for any expense allocable to tax-exempt income. A Real estate developer denied NOL deductions: In Sage,45 the Tax Court held that the transfers of parcels of real estate by a real estate developer to liquidating trusts (for the benefit of mortgage holders) did not have the effect of producing the losses claimed for the years because there were no bona fide dispositions or completed transactions regarding the property transfers to the liquidating trusts. However, Congress eliminated the use of ESOPs for closely held S corporations, effective in 2005. 1377(a)(2) 1362: Election; revocation; termination. If a second-class-of-stock issue exists, it may be possible to obtain Sec. in Example 1, except taxable income for the entire year If no election is made, there is no closing of the The In this case, S would prefer to forgo The units recite the law, as interpreted by the IRS. acquires more stock during the tax year. The updates are intended to provide greater clarity for shareholders on how to compute their U.S. income tax liabilities with respect to international tax matters, including how to compute deductions and credits. S corporations are flowthrough entities, and pertinent items of income and expense are allocated to shareholders on a per share per day basis. Of course, B wants the election. If this outcome can be mitigated by considering cash distributions up to the amount of total GILTI as not being made under the normal rules of Sec. The IRS advises examiners of common errors made by taxpayers in their computation of AAA, for example: The IRS also advises its examiners that a significant difference between retained earnings and AAA is an indication of the existence of positive AE&P, that an S corporation may estimate its AE&P based on retained earnings as of its last C year, and that the duty of consistency precludes an S corporation from changing the character of distributions reported in closed statute years from nondividend to dividend. The Fourth Circuit upheld the Tax Court's ruling under the economic substance doctrine, holding that the complex transactions were undertaken solely to reduce tax liability and did not have a reasonable expectation of economic profit. All rights reserved. shareholders to be allocated income earned only while they Sec. It is essentially impossible for an individual who renders services, such as the taxpayers, to be "returned" to their original position prior to their services. Fourteen sections of the Internal Revenue Code are central to the taxation of Subchapter S corporations and their shareholders. 29Jamison et al., "Current Developments in S Corporations," 51The Tax Adviser 322 (May 2020). This is the ending date for the period in the year . Enjoy!
