Flow-through taxes for S corporations will be a whole lot different for 2018 than they were for 2017, warns Vicki L. Mulak, an enrolled agent and certified financial planner. That’s because the tax reform bill passed at the end of last year changed the tax structure affecting companies with follow-through finances.
Mulak recently updated more S Corp tax rules in a conference for Eli Financial, “Flow-Through Taxation Competencies for the S Corporate Client.”
SSMCs are now required to consent to S elections in community property scenarios, Mulak said. S corporation stock and related suspended losses can transfer tax-free under IRC §1041(a).
Discharging Debt: Not Necessarily a Simple Matter
Under deemed S corp final regulations, to discharge debt, the S corp:
- must “share” information regarding shareholder tax attributes,
- reduce the attributes, and then
- announce the amount of remaining attributes to shareholders.
Mulak said that net investment income tax (NIIT) applies to the sales of S corporation stock, even if it does not apply to K-1 operational income. For the NIIT simplified method:
- NIIT uses a “look-back” period, which is the current year and the previous two years.
- The investment income during the period must be 5 percent or less of all income.
- The disposition gain must be less than $5 million and total income recognized on disposition must not exceed $250,000.
- Shareholder interest in the S corp must have been for 12 months or more.
- Loss and deduction items are treated as negative numbers and netted to positive income items.
How Well Do You Know Form 2553?
Tax preparers should be familiar with Form 2553, said Mulak, which is four pages long and covers the following:
- Page 1: modifications to allow for “reasonable cause” statements
- Page 2: signed consents (note: spousal consents are required in community property states)
- Page 3 fiscal year choices or simultaneous QSST elections if stock has been transferred
- Page 4 signature
The S Corp Year Is the Calendar Year—Except When It’s not
Finally, Mulak noted particulars of the S corporation tax year, which is required to be the calendar year. The ownership tax year is:
- Permitted under the automatic consent provisions of Rev-Proc 2006-46;
- Triggered when the majority of shareholders have a tax year other than the calendar year; and
- Rarely encountered in S corp scenarios, but is more common in partnership scenarios.
