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Frequently Asked Tax Questions And Answers
Keyword: S Corporation
9.1 Estimated Tax: Businesses
Is an S-Corporation required to pay quarterly estimated tax?
Generally, the corporation must make estimated tax payments for the following taxes
if the total of these taxes is $500 or more:
the tax on certain capital gains,
the tax on built-in gains,
the excess net passive income tax, and
the investment credit recapture tax.
For more information regarding estimated tax, refer to
Instructions for Form 1120S, U.S. Income Tax Return for an S Corporation, page 5 and Publication 542, Corporations, page 4.
References:
12.1 Small Business/Self-Employed/Other Business : Entities: Sole Proprietor, Partnership, Limited Liability Company/Partnership (LLC/LLP), Corporation, Subchapter S Corporation
How do I set up a company as a subchapter S corporation?
Once you have established your corporation according to your state's requirements,
you elect S corporation status for federal tax purposes by filing Form 2553 (PDF), Election by a Small Business Corporation. Several requirements
must be met before you can elect S corporation status.
Instructions for Form 2553, Election by a Small Business Corporation, provides the information
on these requirements.
References:
I have a C corporation. What is the procedure to change it to an S corporation?
Once you have established your corporation according to your state's requirement,
to convert from a C corporation to an S corporation, you must meet the same requirements
as a newly formed corporation electing S corporation status. You must meet the requirements
of a "small business corporation" which are, in general:
Be a domestic corporation organized under the law of any state or U.S. territory;
Have only individuals, estates or certain trust as shareholders (no partnerships
or corporations as shareholders;
Have only citizens or residents of the United States as shareholders;
Have only one class of stock (differences in voting rights are OK)
The S corporation can have no more than 75 shareholders and must make the election
to be an S corporation on Form 2553 (PDF), Election
by a Small Business Corporation, before the 16th day of the third month following
the close of the C corporation's tax year if the election is to be effective for the
current tax year. The C corporation must qualify as an eligible corporation during
those 2 1/2 months and all shareholders during those 2 1/2 months must consent, even
if they do not own stock at the time of the election. If the election is filed after
the 15th day of the third month of the tax year, the election will be in effect for
the next tax year and all shareholders at the time of the election must consent. For
late elections that qualify for treatment as timely filed see Rev. Prov. 98-55. S-Corporation
file Form 1120S for the tax year the election takes effect.
References:
What is the procedure for revoking subchapter S election for a corporation?
Voluntary termination of an S election is made by filing a statement with the Service
Center where the original election was properly filed. A revocation may be made only
with the consent of shareholders who, at the time the revocation is made, hold more
than one-half of the number of issued and outstanding shares of stock (including nonvoting
stock) of the corporation. There is specific information that must be included in
the statement and this information is outlined in Regulations section 1.1362-6(a)(3)
and in
Instructions for Form 1120S, U.S. Income Tax Return
for an S Corporation.
The revocation may state an effective date as long as it is on or after the date
the revocation is filed. If no date is specified and the revocation is filed before
the 15th day of the third month of the tax year, the revocation will be effective
for the current tax year. If the revocation is filed after the 15th day of the third
month of the tax year, the revocation will be effective for the next tax year.
You may want to consult the IRS Customer Service phone line at 1-800-829-4933 or
you may wish to consult with a tax professional to be certain you have all the necessary
information to file a proper revocation.
The S corporation election terminates automatically under certain conditions. Refer
to
Instructions for Form 1120S, U.S. Income Tax Return for an
S Corporation.
References:
-
Instructions for Form 1120S, U.S. Income Tax
Return for an S Corporation
- Treas. Reg. section 1.1362-6(a)(3)
- Treas. Reg. section 1.1362-2(a)
12.9 Small Business/Self-Employed/Other Business : Starting or Ending a Business
What deductions can I take on my partnership or S Corporation return
In general, ordinary and necessary business expenses are deductible on business
return. However, there are some items that partnership and S Corporation do not deduct
at the business entity level but rather at the partner or shareholder level. These
are referred to as separately stated items. For a more complete explanation of business
in general, see Publication 535 , Business Expenses Publication 541, Partnerships, and
Instructions for Form 1120S.
References:
How do I terminate or close down a corporation (S or C)?
The process for closing a corporation consists of many steps that need to be followed
in a specific order and within specified time frames. See Small Business/Self
Employed - Closing a Business for information to properly terminate your business
entity with the Internal Revenue Service.
References:
How does a corporation deduct a capital loss?
Subchapter C Corporation
This type of corporation can deduct capital losses only up to the amount of capital
gains. If capital losses exceed capital gains, the excess is first carried back three
years prior to the loss year and used to offset capital gains. Then, any unused loss
is carried forward up to five years from the loss year to offset capital gains in
those years. If the corporation is dissolved, the loss is not carried to any other
year or return, it is simply lost.
A corporation may not carry a capital loss from or to a year
in which it operates as a Subchapter S Corporation.
Rules for Carryback and Carryforward
When carrying a capital loss from one year to another, the following rules apply:
1. When figuring the current year capital loss, you cannot combine it with a capital
loss carried another year. In other words, you can carry capital losses only to years
that would otherwise have a net capital gain.
2. If you carry capital losses from 2 or more years to the same year, deduct the
loss from the earliest year first.
3. You cannot use a capital loss carried from another year to produce or increase
a net operating loss in the year to which you carry it back.
Corporation must include capital gain in full in gross but only to the extent they
exceed capital losses. A corporation is taxed on net capital gain at the regular tax
rate, including the additional phase-out rates for high-income corporations. See
Instructions for Form 1120/1120A, U.S. Corporation Income Tax Return,
and Publication 542, Corporations for additional information.
Subschapter S Corporations
An S Corporation generally passes gains and losses through to the shareholders
based on their percentage of ownership (distributive share). For more information
on how to calculate and report these losses, see
Instructions for Form 1120S, Schedule K-1, Form 4797 (PDF), Sales
of a Business, Form 1120S (PDF), U.S. Income
Tax Return for an S Corporation, Entities: Sole Proprietorship, Limited
Liability Company/Partnership (LLC/LLP, Corporation, Subchapter S Corporation.
References:
What type of entity am I?
If you an unincorporated business by yourself, you are considered a sole proprietor.
However, if you are the sole member of a domestic limited liability company (LLC),
you are not a sole proprietor if you elect by filing Form 8832 (PDF) , Entity Classification Election, to treat the LLC as a corporation.
An husband or wife may be sole proprietor with the spouse an employee.
An unincorporated organization with two or more members is generally classified
as a partnership for federal tax purposes if it members carry on a trade, business,
financial operation or venture and divide its profits.
If a husband and wife jointly own and operate a business and share in the profits
and losses, they are partners in a partnership.
The following businesses are taxed as corporations:
A business formed under a federal or state law that refers to it as a corporation,
body corporate, or body politic.
A business formed under a state law that refers to it as a joint-stock company
or joint-stock Company.
Insurance Company
Certain banks
A business wholly owned by a state or local government.
A business specifically required to be taxed as a corporation by the Internal
Revenue Code (for example, certain publicly traded partnerships).
Certain foreign business
Any other business that elects to be taxed as a corporation by filing Form 8332.
References:
- Publication 541, Partnerships
- Publication 542, Corporations
- Publication 3402 (PDF), Tax Issues
For LLCs
- Publication 334, Tax Guide for Small Business
- Entities: Sole Proprietor, Partnership, Limited Liability Company/Partnership
(LLC/LLP), Corporation, Subchapter S Corporation Form 8332 (PDF) , Release for Claimed to Exemption for Child or Divorced or Separated
Parents
What is the due date for business returns?
Some forms and entities have due dates other than the well-known April 15th due
date. The instructions for the each type of form used will have the appropriate due
date(s) noted. In general, sole proprietor's schedule of income and expenses is attached
to the 1040. Therefore, the due date is the same as the 1040.
A Corporation must generally use the calendar year, unless the entity can establish
a business purpose for having a different tax year. The due date is usually March
15th.
A partnership generally must conform its tax year of the partners unless the partnership
can establish a business purpose for having a different tax year. The tax year is
the same as one or more partners that own (in total) more than a 50-percent interest
in partnership profits and capital. If there is no majority interest tax year, the
partnership must adopt the same tax year as that of its principal capital holder.
Where neither condition is met, a partnership must use the calendar year. A limited
Liability Company reporting as a partnership has the same tax year as a majority of
its partners.
References:
- Publication 541, Partnerships
- Publication 542, Corporation
- Publication 334, Tax Guide for Small Business
- Entities: Sole Proprietor, Partnership, Limited Liability Company/Partnership
(LLC/LLP), Corporation, Subchapter S Corporation
How is the withdrawal of a partner handled?
Unfortunately, the answer to this question has many variables. Publication 541, Partnerships "Disposition of Partner's Interest" on Partnerships
should provide the information needed.
References:
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