Question

Assume a client requests you explain in writing to its Board of Directors the potential benefits and problems of electing to be taxed pursuant to Subchapter “S” of the Internal Revenue Code. Prepare a letter to the Board in not less than 1,000 nor more than 2,000 words. The letter should include how and when the election can be made, the effect on the tax liabilities of both the corporations and its shareholders, and a comparison with partnership taxation.

Answer 1

SOLUTION:-

Subchapter "S" of the Internal Revenue Code.:

* Contemplating between C or S corporation will weigh more for the S corporation for certain benefits.

* The C Corporation will get double tax – once the corporation will pay the tax for income and then again the share holders will have to pay the tax too. But the S corporation is tax beneficial because, the income is taxed just only once at the level of the share holders.

* But the S corporation has a upper ceiling when it comes to the number of share holders which cannot exceed 100. The members need to US citizens.

* Never the less, the S corporation has strict accounting self regulation standards, if you company had been a C corporation and you are converting it to an S corporation, and then you may have to pay out taxes at the corporate bracket. Hence it is better to start as an S corporation from the beginning itself.

* This can be achieved by lodging the S election inside 74 days of incorporating the corporation. And more over S corporation is very suitable for small firms than C Corporation.

* The internal revenue code consists of Subtitles A to K that includes areas like Income tax, real estate, gifts, gratuities, annuities, wage tax, excise duty, consumer goods tax, administrative efforts, financing for the presidential election campaign, and the health insurance for the group.

Subchapter “S” of the Internal Revenue code:

Explanation or report addressed to the board of directors:

Merits and demerits of electing:

* Electing based on S corporation has a better tax rate than the C Corporation. It includes both the tax benefits and the non tax benefits. If a firm involves risk operations, in order to avoid litigations, they can consider going for a Limited Liability Company (LLC). This will avoid the double tax problem as it will happen to the C Corporations.

Process of election:

* Subtitle H of the twenty sixth US code covers the funding aspects for the Electing.

* All of the existing share holders must accept for the election; every share holder must be a human being and of course it excludes the estates.

Date of election:

* The election date must be agreed upon, and ample time given ahead in order to conduct the election activities.

Effect on tax liabilities of corporation:

* Taxes are double for C Corporations – but they are just taxed once for S Corporations.

Effect on tax liabilities of share holders:

* The liabilities of the share holders are already listed above.

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