During the period of July 10, 2011- July 9, 2012, major changes that directly affect S Corporations took place. The ability to flow entity-level looses to its shareholder is a major motivation for corporations choosing S status.
In order for a corporation to qualify as an S corporation, several requirements must be met. In addition to the requirements, there are several types of elections that the corporation or its shareholders must make to qualify. Sec. 1361(b) restricts ownership in an S corporation toU.S.citizens, resident individuals, estates, certain trusts, certain pension plans, and certain tax-exempt charitable organizations.
An S corporation is limited to have one class of stock by the Sec. 1361(b)(1)(D). If an S corporation has a sub-chapter C accumulated earnings and profits (AEP), it will be subject to taxes under Sec. 1375 on its excess net passive investment income if its total passive investment income exceeds 25% of its gross receipts. Its S election automatically terminates the first day of the fourth year, if the total passive income exceeds 25% of its gross receipts for three years. Sec. 6045B requires any change in the capital structure of a corporation important to be reported within 45 days to the IRS and the shareholder.
T.D. 9522 is applied to tax years beginning on or after April 11, 2011and distinguishes a controlled group under Sec. 1563 from the affiliated group rules of Sec. 1561. There was concern that the new rules would limit some S corporations’ Sec. 179 deduction, but in fact each corporation will be entitled to its own $500,000/$2 million limitation.
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 maintained the capital gain and dividend 15% tax rates for 2011 and 2012 and extended the alternative minimum tax patch for 2011. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 reduced the Social Security rate for employees and the self-employed by 2% for 2011, and it is extended through 2012 because of the Middle Class Tax Relief and Job Creation Act of 2012.
Taxpayers should consider gifting appreciated S corporation stock to their children, grandchildren, or parent because the zero capital gains rate for individual taxpayers in the lower two tax brackets were extended in 2012.
If you have any questions or concerns, make an appointment with us at 401-254-0251. We look forward to hearing from you.