30 THE QUEENS COURIER • OCTOBER 3, 2019 FOR BREAKING NEWS VISIT WWW.QNS.COM
TAX TIPS
S CORPORATIONS
BY JOHN SAVIGNANO, CPA
Lots of goings on involving S corporations. As a reminder, the
income of S firms flows through to their owners and is taxed at
individual tax rates. And subject to limitations, owners are able to
deduct their pro rata share of losses on their 1040 returns.
Start with changes made by tax reform: The 20% qualified business
income deduction.
Self-employed people and owners of pass-through firms such as S
corporations can take this popular break, subject to limitations that
apply to high earners. The K-1s you get have new codes to reflect this
change.
Also, the limitation on deducting business losses on individual
returns. The amount of trade or business losses that exceeds a
$500,000 threshold for couples and $250,000 for other filers is
nondeductible, with the excess carried forward.
Keep an eye on a Senate bill’s simplifications for S corporations.
Among the desired changes: Allowing banks to have IRAs as
shareholders. And easing rules for corporations with retained profits
that switch to S status. More of their income could be passive before a
special penalty tax would apply. Currently, if over 25% of a former
regular corporation’s gross receipts are passive, the S firm owes a 21%
tax on the excess. And if this happens for three straight years, it can
lose its S status. The bill would hike the 25% passive income threshold
to 60% and would repeal the excessive passive income rule as an
S-election termination event.
Boosting tax enforcement on the S corporation front is a goal of IRS.
As shown by campaigns from its Large Business and International
Division that focus on risk areas in which IRS has found taxpayer
compliance to be lacking. One targets distributions by S corporations.
Among some of the concerns: S firms that fail to report gain on
distributions of appreciated property to shareholders. C corporations
with accumulated earnings and profits that elect to switch to S status
and later make distributions that should properly be treated as taxable
dividends. Also, cash or property distributions by S firms to
shareholders in excess of stock basis. A second, risk-focused
compliance campaign involves the built-in-gains tax…the 21% levy
paid by corporations that convert to S status on profits from sales of
assets owned before the conversion and sold within five years after the
switch.
Shareholder basis in S corporations is a third big enforcement
priority. Owners of S corporations can deduct loses only up to their
stock basis and loans that they make to the company. IRS know that
compliance in this area is deficient. IRS is conducting audits in this
area. Exams are at the shareholder level. Agents are checking to see
whether shareholders are properly tracking their basis.
Many S firm owners must now include basis information with their
1040. Starting with 2018 returns, they must check a box on line 28 of
Schedule E and attach a basis computation. This requirement applies
to those who report a loss, dispose of their stock, or receive a
distribution or loan repayment from the company.
John Savignano is a partner with Savignano Accountants & Advisors
located at 47-46 Vernon Blvd., Second Floor, in Long Island City. If you
have any questions or require additional information, please call John
at 718-707-0955.
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