The Internal Revenue Service (IRS) issued Notice 2020-75, which announces rules to be included in forthcoming proposed regulations. Specifically, the proposed regulations will clarify that State and local income taxes imposed on and paid by a partnership or S corporation on its income are allowed as a deduction by the partnership or S corporation in computing its non-separately stated taxable income or loss for the taxable year of payment, and therefore are not subject to the State and local tax deduction limitation for partners and shareholders who itemize deductions.
The notice describing the forthcoming proposed regulations applies to these types of income taxes starting today, and also allows taxpayers to apply these rules to specified income tax payments made in a taxable year of a partnership or an S corporation ending after Dec. 31, 2017, and before the date the forthcoming proposed regulations are published in the Federal Register.
Updates on the implementation of the Tax Cuts and Jobs Act (TCJA) can be found on the Tax Reform page of IRS.gov.
To date, LB&I has announced a total of 59 campaigns.
The campaigns described below were identified through LB&I data analysis and suggestions from IRS employees. LB&I’s goal is to improve return selection, identify issues representing a risk of non-compliance, and make the greatest use of limited resources. The new campaigns are:
S Corporations Built in Gains Tax
Practice Area: Pass Through Entities
Lead Executive: Holly Paz, Director of Pass Through Entities
C corporations that convert to S corporations are subjected to the Built-in Gains tax (BIG) if they have a net unrealized built-in gain and sell assets within 5 years after the conversion. This tax is assessed to the S corporation. LB&I has found that S corporations are not always paying this tax when they sell the C corporation assets after the conversion. LB&I has developed comprehensive technical content for this campaign that will aid revenue agents as they examine the issue. The goal of this campaign is to increase awareness and compliance with the law as supported by several court decisions. Treatment streams for this campaign will be issue-based examinations, soft letters, and outreach to practitioners.
According to the IRS, S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes.
Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income at the entity level.
To qualify for S corporation status, the corporation must meet the following requirements:
In general, section 965 of the Code requires United States shareholders, as defined under section 951(b) of the Code, to pay a transition tax on the untaxed foreign earnings of certain specified foreign corporations as if those earnings had been repatriated to the United States. Very generally, section 965 of the Code allows taxpayers to reduce the amount of such inclusion based on deficits in earnings and profits with respect to other specified foreign corporations. The effective tax rates applicable to such income inclusions are adjusted by way of a participation deduction set out in section 965(c) of the Code. A reduced foreign tax credit applies to the inclusion under section 965(g) of the Code. Taxpayers, pursuant to section 965(h) of the Code, may elect to pay the transition tax in installments over an eight-year period. Generally, a specified foreign corporation means either a controlled foreign corporation, as defined under section 957 of the Code (“CFC”), or a foreign corporation (other than a passive foreign investment company, as defined under section 1297 of the Code, that is not also a CFC) that has a United States shareholder that is a domestic corporation.
According to IRC Section 965 domestic partnerships, s – corporations, passthrough entities are required to report information to partners, shareholders and/or beneficiaries in connection with the code. A domestic partnership, S corporation, pass-through entities or other passthrough entity should attach a statement to its Schedule K-1s, if applicable, that includes the following information for each deferred foreign income corporation for which such passthrough entity has a section 965(a) inclusion amount:
When computing compensation for employees and shareholders, S corporations may run into a variety of issues. The information below may help to clarify some of these concerns.
S corporations must pay reasonable compensation to a shareholder-employee in return for services that the employee provides to the corporation before non-wage distributions may be made to the shareholder-employee. The amount of reasonable compensation will never exceed the amount received by the shareholder either directly or indirectly.
The instructions to the Form 1120S, U.S. Income Tax Return for an S Corporation, state “Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation.”
Several court cases support the authority of the IRS to reclassify other forms of payments to a shareholder-employee as a wage expense which are subject to employment taxes.
Why do you keep forming LLCs, partnerships or any kind of corporation when you’re not really ready to do business?
Then, you have these legal entities, with stringent tax filing responsibilities – and you do nothing.
Do you take notice when it comes to new California tax laws and updates? Here is one that taxpayers and tax preparers alike will want to pay attention to.
September 15 – Corporations
File a 2014 calendar year income tax return (Form 1120 or 1120-A) and pay any tax, interest, and penalties due. This due date applies only if you timely requested an automatic 6-month extension.
September 15 – S Corporations
File a 2014 calendar year income tax return (Form 1120S) and pay any tax due. This due date applies only if you requested an automatic 6-month extension.
September 15 – Corporations Read More
As a general rule, U.S. residents are only subject to Canadian tax on business income to the extent that such income is earned via a permanent establishment (“PE”) in Canada(1).
If a U.S. C corporation earns profits that are taxable in Canada, such profits will be subject to federal corporate taxation under Part I of the Income Tax Act (“the Act”) at a rate of 15%, plus, assuming there is a PE in a province, provincial corporate taxation at varying rates. For example, in Ontario the rate is 11.5% and in Alberta the rate is 10%, thereby resulting in combined corporate tax rates of 26.5% and 25%, respectively(2).
In addition, a U.S. corporation earning income from carrying on business in Canada may also be subject to the “branch tax” that is levied under Part XIV of the Act. This tax is quite Read More
An S Corporation or S Corp is an eligible domestic corporation that has elected to be treated as an S Corporation for tax purposes. S Corporations avoid double taxation on corporate income because corporate income, losses, deductions and credits are passed through to the shareholders. Shareholders of the S corporation report the income and losses on their personal tax returns. However, S Corps are responsible for tax on certain built-in gains and passive income at the entity level.
Undistributed taxable income of the S corporation that is passed through to its shareholders is not treated as earnings from self- employment (Rev. Rul. 59-221, 1959-1 C.B. 225) and is therefore not subject to self-employment tax. Read More
Over the past five years, a few widely noted cases and multiple government reports have made reasonable compensation a key tax issue for S corporations. Two recent Tax Court opinions focusing on reasonable compensation for S corporation shareholder-employees provide important takeaways for owners and practitioners by addressing common issues surrounding distributions and loan repayments in the context of reasonable compensation.
Secs. 3111 and 3301 require employers to pay FICA and FUTA employment taxes on wages paid to their employees. For federal employment tax purposes, an employee includes any officer of a corporation. An officer who performs more than minor services for a corporation and who receives remuneration in any form for those services is considered an employee Read More
Taxpayers with ownership interests in flow-through entities cannot deduct entity losses if they do not have basis in those entities. Consequently, a taxpayer’s basis is often scrutinized by the IRS, particularly when basis is claimed based upon debts incurred by a flow-through entity.
In mid-2012, the IRS issued Prop. Regs. Sec. 1.1366-2 (REG-134042-07) to establish a standard for when shareholders can increase basis in S corporations based upon loans to the S corporation. Under this standard, a shareholder may increase basis by “bona fide indebtedness” of the S corporation that runs directly to the shareholder. Partners, in contrast, are subject to the more complex partnership basis rules of Secs. 752 and 465. As basis laws change and develop over time, the IRS will continue to scrutinize reported losses.
The proposed regulations do not establish factors or criteria to determine when S corporation indebtedness is bona fide. Instead, whether indebtedness is bona fide is determined under general tax principles. The preamble to the proposed regulations cites four cases that establish whether a debt is bona fide: Knetsch, 364 U.S. 361 (1960); Geftman, 154 F.3d 61 (3d Cir. 1998); Estate of Mixon, 464 F.2d 394 (5th Cir. 1972); and Litton Business Systems, Inc., 61 T.C. 367 (1973). Geftman, for instance, established three factors to determine whether a loan is bona fide: (1) contemporaneous intent to repay; (2) Read More