Question

What are two sources of tax guidance (e.g. IRS code, Revenue Procedure) for each Partnership, C corporation, and S corporation? How does it define a component of the tax policy for that form of organization?

Answer 1

The two sourced of tax guidance for each partnership, C corporation and S corporation are:

1. Tax Cuts and Jobs Act (TCJA) and

2. Internal Revenue Code (IRC).

According to TCJA, "An S corp does not have a legal responsibility to pay taxes on its own — the owners of the company pay taxes on their income". “C corporations have no restrictions on ownership — they can have an unlimited number of shareholders— while S corporations can only have up to 100 shareholders.”

• Both S and C corps have limited liability.
• Both S and C corps have perpetual existence – if the owner/shareholder passes away, the corporation continues to exist.
• C corps have no shareholder limit, while S corps have limited ownership options (including the fact that S corps cannot be owned by individuals living outside the US).
• C corps can be owned by other C corps.
• C corps can deduct fringe benefits, like disability and health insurance.
• C corp owners can’t write off losses on their personal return, while S corp owners can.
• It may be easier to grow as a C corp.
• S corps must pay a “reasonable wage” to employee-shareholders, and this is one item the IRS scrutinises.

According to IRC, S-Corporations are not subject to corporate tax rates and are exempt from federal income taxes except for certain capital gains and passive income, according to the IRS.

Instead, S-Corporations pass-through profits (or net losses) to shareholders. The business profits are taxed at individual tax rates on each shareholder's Form 1040. The pass-through nature of the income means the corporation's profits are taxed only once—at the shareholder level.

S-Corporations, like C-Corporations, can decide to retain their net profits as operating capital. However, all profits are considered as if they were distributed to shareholders. Therefore, an S-Corporation shareholder might be taxed on income never received because it was retained by the business. A shareholder of C-corporation, on the other hand, is taxed on dividends only when those dividends are actually paid out.

For purposes of this title, the term “S corporation” means, with respect to any taxable year, a small business corporation for which an election under section 1362(a) is in effect for such year.

C corporation

For purposes of this title, the term “C corporation” means, with respect to any taxable year, a corporation which is not an S corporation for such year.

Small business corporation

For purposes of this subchapter, the term “small business corporation” means a domestic corporation which is not an ineligible corporation and which does not—

1. Have more than 100 shareholders,
2. Have as a shareholder a person (other than an estate, a trust described in subsection (c)(2), or an organization described in subsection (c)(6)) who is not an individual,

• Have a nonresident alien as a shareholder, and
• Have more than 1 class of stock.