Quiz 11: S Corporations
Some of the advantages and disadvantages which might be included in the answer are: Advantages: • The corporation's income is exempt from the corporate income tax. • The corporation's losses are passed through to the shareholders. • Undistributed income that has been taxed to the shareholder is not taxed again when subsequently distributed. • Capital gains dividends and tax- exempt income are separately stated and pass through to the shareho • Deductions, losses, and tax credits are separately stated and passed through to the shareholders. • S corporations are not subject to the alternative minimum tax. • S corporations are not subject to the personal holding company tax. • S corporations are not subject to the accumulated earnings tax. • S corporations may split income between family members. Disadvantages: • A C corporation is treated as a separate tax entity and can use the 15% tax bracket. • S corporation earnings are taxed to the shareholder even if not distributed. • S corporations are subject to an excess net passive income tax, LIFO recapture tax, and built- in gains t • Dividends received by the S corporation are not eligible for the dividends- received deduction. • Allocation of income and loss is based on stock owned on each day of the tax year. Special allocations permitted. • The loss limitation is smaller for an S corporation than a partnership because of the treatment of gener debts incurred by the S corporation. • An S corporation and its shareholders are subject to the at- risk, passive activity, and hobby loss limitations with respect to their loss and deduction pass- throughs. • An S corporation is restricted in the type and number of shareholders allowed and types of investmen can be made. • S corporations are generally restricted to using a calendar year as their tax year. The advantages and disadvantages are summarized on pages C:11- 3 and C:11- 4.