Question

You are the lead S-Corporations tax specialist in your area. Your client, Cathyrn, has purchased an S Corporation and needs to be versed on how this type of corporation works. Identify three operating issues (e.g. accounting period, income/loss allocation, operating/liquidating distributions, stock basis calculations, fringe benefit rules) that Cathyrn should be aware of in managing this form of business.

Answer 1

HELLO,

         YOUR QUESTION IS ABOUT S-CORPORATION. SO LETS START WITH THE MEANING OF S- CORPORATION.

S-CORPORATION

AN S CORPORATION IS ONE WHICH IS REQUIRE TO PAY LESS TAX AS COMPARED WITH OTHER CORPORATIONS. IT ALLOWS ITS SHAREHOLDERS TO INCLUDE COMPANIES INCOMES AND LOSSES AS THEIR OWN AND FILE TAX BY THEMSELVES. SO IT HELP TO ELIMINATE DOUBLE TAXATION . THE FOLLOWING CRITERIA SHOULD BE FULL FILLED FOR RECOGNIZING A COMPANY AS S-CORPORATION

• COMPANY SHOULD CONDUCT BUSINESS WITHIN THE COUNTRY ONLY OR IT IS A DOMESTIC COMPANY
• IRS ELIGIBILITY REQUIREMENT SHOULD BE FULL FILLED BY ALL OF ITS SHAREHOLDERS
• NUMBER OF SHAREHOLDERS SHOULD BE 100 OR LESS
• COMPANY DOING BANKING OR INSURANCE BUSINESS WILL NOT GET RECOGNITION AS S CORPORATION
• SHAREHOLDERS MUST BE INDIVIDUALS,SPECIFIC TRUSTS OR PARTICULAR TAX EXEMPTED ORGANIZATIONS

OPERATING ISSUES FACED BY S CORPORATION

• S CORPORATION SHOULD PAY REASONABLE AMOUNT OF SALARIES TO ITS EMPLOYEES . BECAUSE THE IRS SHOULD SCRUTINIZES ITS PAYMENT ACTIVITIES. THESE TYPE OF ENTERPRISES DISGUISE SALARY AS CORPORATE DISTRIBUTION IN ORDER TO AVOID PAYROLL TAX .. SO CARE MUST BE GIVEN WHILE PAYING TO EMPLOYEES OR SHAREHOLDERS. OTHERWISE THE COMPANY MAY BE TERMINATED BY IRS
• ALL INVESTORS OF S CORPORATION SHOULD GET DISTRIBUTION RIGHTS AND DIVIDEND RIGHTS BECAUSE ALL SHAREHOLDERS HAVE IDENTICAL RIGHTS. IT MAY LEAD TO DISPUTES AND ALSO EXPENSIVE TO THE COMPANY. ALSO IT SHOULD AFFECT THE PROFIT MARGIN OF CORPORATION.
• HIGH INCORPORATION FEES AND ITS TIME CONSUMING AND MONITORY LOSS.
• SOME OF THE FRINGE BENEFITS PAID TO SHAREHOLDERS WHO ARE THE EMPLOYEES OF THE COMPANY AND HOLD 2 OR MORE PERCENTAGE OWNERSHIP OF COMPANY SHOULD INCLUDE TO THEIR WAGE AND TAX STATEMENT. PAYMENT TO PENSION AND PROFIT SHARING PLANS,WORKING CONDITION FRINGE BENEFITS ETC ..SHOULD GET EXEMPTION FROM TAXATION.
• INVESTORS IN AN S CORPORATION SHOULD BE AWARE OF THEIR CAPITAL INVESTMENT IN PROPERTY FOR TAX PURPOSE.IT IS USED TO IDENTIFY YOUR GAIN AND LOSS, AMORTIZATION ETC...SHAREHOLDERS IN S CORPORATION WILL RECEIVE K-1 REFLECTING CURRENT YEAR INCOME AND LOSS, BUT DOES NOT REFLECT YOUR TAXABLE DISTRIBUTIONS. BECAUSE TAXATION DEPENDS ON YOUR BASIS OR CAPITAL INVESTMENT IN PROPERTY.

THESE ARE THE IMPORTANT POINTS TO BE CONSIDERED , THANK YOU :)