In: Accounting
4. Sales Inc. was a regular C corporation with only 100 shares issued for many years. In 2015 they filed the necessary forms to become an S corporation as of January 1, 2016. At the time they had $500,000 of retained earnings. They had no cash because they had been using all the profit to pay down the mortgages. All shareholders meet the at-risk and active tests for all transactions. Tom bought his 50 shares for 50,000 when Sales was formed in 1996. Vic bought his 25 shares in 2011 for $200,000. Wes bought his 25 shares in 2014 for $350,000. In 2016 Sales made a profit of $900,000. They used the profit to purchase real estate. There were no distributions to shareholders. What will Tom, Vic and Wes report on their income tax returns for 2016?
In 2016, the Sales Inc, (which was C corporation before 2016 ) is now a S corporation & due to this reason the rules related to tax liability has been changed. C corporation And S corporation both are entirely different corporation and thus the tax treament in both is different, Earlier the tax on Sales Inc profit is levied on the corporation itself, there is no bearance of sharesholder in respect of the payment of tax liability during that time but now the corporation is totally in different form, and under this form the shareholders have to bear the tax liability, whaether it is distributed or not among the shareholder, the veil between corporation and shareholder are now vanished ie (separate legal entity). Shareholder will bear the cost of tax liability under S corporation. so therefore Tom, Vic and Wes have to bear the cost of tax liability of Sales Inc S Corporation, and they to disclosed the corporation profit (though not distributed) in their income tax return form, for the payment taxes of S corporation
Although profits are used to purchase real estate, it is an investment made by the coporation in capital assets, and the expenditure on the capital assets are not exempted from taxes unlike revenue expenditure, taxes still in all way bear by the shareholder themselves.