Businesses
This is archived information that pertains only to the 2002 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.
Is an S-Corporation required to pay quarterly estimated tax?
Generally, the corporation must make estimated tax payments for the following taxes if the total of these taxes is $500 or more: - the tax on certain capital gains,
- the tax on built-in gains,
- the excess net passive income tax, and
- the investment credit recapture tax.
For more information regarding estimated tax, refer to Instructions for Form 1120S, U.S. Income Tax Return for an S Corporation, page 5 and Publication 542 (PDF), Corporations, page 4.
References: 12.1 Small Business/Self-Employed/Other Business: Entities: Sole Proprietor, Partnership, Limited Liability Company/Partnership (LLC/LLP), Corporation, Subchapter S Corporation How is the IRS notified of the entity classification under the tax regulations?
Under regulations, many business entities can elect the tax entity (partnership, corporation, or disregarded entity) that best suits their needs. This approach is popularly called "check the box." Taxpayers should notify the IRS of any check-the-box election by filing Form 8832 (PDF), Entity Classification Election. If a taxpayer does not file Form 8832, a default classification will apply.
Read Reg. 301.7701-3 and Form 8832 for more information.
References: - Form 8832 (PDF), Entity Classification Election
- Reg. 301.7701-3
How do I set up a company as a subchapter S corporation?
Once you have established your corporation according to your state's requirements, you elect S corporation status for federal tax purposes by filing Form 2553 (PDF), Election by a Small Business Corporation. Several requirements must be met before you can elect S corporation status. Instructions for Form 2553, Election by a Small Business Corporation, provides the information on these requirements.
References: I have a C corporation. What is the procedure to change it to an S corporation?
To convert from a C corporation to an S corporation, you must meet the same requirements as a newly formed corporation electing S corporation status. You must meet the requirements of a "small business corporation" which are, in general: - Be a domestic corporation organized under the law of any state or U.S. territory;
- Have only individuals, estates or certain trust as shareholders (no partnerships or corporations as shareholders;
- Have only citizens or residents of the United States as shareholders;
- Have only one class of stock (differences in voting rights are OK)
The S corporation can have no more than 75 shareholders and must make the election to be an S corporation on Form 2553 (PDF), Election by a Small Business Corporation, before the 16th day of the third month following the close of the C corporation's tax year if the election is to be effective for the current tax year. The C corporation must qualify as an eligible corporation during those 2 1/2 months and all shareholders during those 2 1/2 months must consent, even if they do not own stock at the time of the election. If the election is filed after the 15th day of the third month of the tax year, the election will be in effect for the next tax year and all shareholders at the time of the election must consent.
References: What is the procedure for revoking subchapter S election for a corporation?
Voluntary termination of an S election is made by filing a statement with the Service Center where the original election was properly filed. A revocation may be made only with the consent of shareholders who, at the time the revocation is made, hold more than one-half of the number of issued and outstanding shares of stock (including nonvoting stock) of the corporation. There is specific information that must be included in the statement and this information is outlined in Regulations section 1.1362-6(a)(3) and in Instructions for Form 1120S, U.S. Income Tax Return for an S Corporation.
The revocation may state an effective date as long as it is on or after the date the revocation is filed. If no date is specified and the revocation is filed before the 15th day of the third month of the tax year, the revocation will be effective for the current tax year. If the revocation is filed after the 15th day of the third month of the tax year, the revocation will be effective for the next tax year.
You may want to consult the IRS Customer Service phone line at 800-829-8374 or you may wish to consult with a tax professional to be certain you have all the necessary information to file a proper revocation.
The S corporation election terminates automatically under certain conditions. Refer to Instructions for Form 1120S, U.S. Income Tax Return for an S Corporation.
References: - Instructions for Form 1120S, U.S. Income Tax Return for an S Corporation
- Treas. Reg. section 1.1362-6(a)(3)
- Treas. Reg. section 1.1362-2(a)
12.9 Small Business/Self-Employed/Other Business: Starting or Ending a Business What deductions can I take on my partnership or S Corporation return
In general, ordinary and necessary business expenses are deductible on business return. However, there are some items that partnership and S Corporation do not deduct at the business entity level but rather at the partner or shareholder level. These are referred to as separately stated items. For a more complete explanation of business in general, see Publication 535 (PDF) , Business Expenses Publication 541 (PDF), Partnerships, and Instructions for Form 1120S.
References: How do I terminate or close down a corporation (S orC)?
The process for closing a corporation consists of many steps that need to be followed in a specific order and within specified time frames. See Small Business/Self Employed - Closing a Business for information to properly terminate your business entity with the Internal Revenue Service.
References: - Small Business/Self Employed - Closing a Business
How does a corporation deduct a capital loss?
Subchapter C Corporation
This type of corporation can deduct capital losses only up to the amount of capital gains. If capital losses exceed capital gains, the excess is first carried back three years prior to the loss year and used to offset capital gains. Then, any unused loss is carried forward five years from the loss year to offset capital gains in those years. If the corporation is dissolved, the loss is not carried to any other year or return, it is simply lost.
A corporation may not carry a capital loss from or to a year in which it operates as a Subchapter S Corporation.
Rules for Carryback and Carryforward
- When carrying a capital loss from one year to another, the following rules apply:
- When figuring the current year capital loss, you cannot combine it with a capital loss carried another year. In other words, you can carry capital losses only to years that would otherwise have a net capital gain.
- If you carry capital losses from 2 or more years to the same year, deduct the loss from the earlies year first.
- You cannot use a capital loss carried from another year to produce or increase a net operating loss in the year to which you carry it back.
Corporation must include capital gain in full in gross but only to the extent they exceed capital losses. A corporation is taxed on net capital gain at the regular tax rate, including the additional phase-out rates for high-income corporations. See Instructions for Form 1120/1120A, U.S. Corporation Income Tax Return, and Publication 542 (PDF), Corporations for additional information.
Subschapter S Corporations
An S Corporation generally passes gains and losses through to the shareholders based on their percentage of ownership (distributive share). For more information on how to calculate and report these losses, see Instructions for Form 1120S, Schedule K-1, Form 4797 (PDF), Sales of a Business, Form 1120S (PDF), U.S. Income Tax Return for an S Corporation, Entities: Sole Proprietorship, Limited Liability Company/Partnershp (LLC/LLP, Corporation, Subchapter S Corporation.
References: What type of entity am I?
If you operate a business as the sole owner and you have not incorporated, you are considered a sole prioprietor. If more than one individual owns an unicorporated business, it is not a sole proprietorship. An exception to this rule is a husband and wife. A husband and wife can own a business as a sole proprietorship or a partnership.
References: What is the due date for business returns?
Some forms and entities have due dates other than the well-known April 15th due date. The instructions for the each type of form used will have the appropriate due date(s) noted. In general, sole proprietor's schedule of income and expenses is attached to the 1040. Therefore, the due date is the same as the 1040.
A Corporation must generally use the calendar year, unless the entity can establish a business purpose for having a different tax year. The due date is usually April 15th.
A partnership generally must conform its tax year to the tax year of the partners unless the partnership can establish a business purpose for having a different tax year. The tax year is the same as one or more partners that own (in total) more than a 50-percent interest in partnership profits and capital. If there is no majority interest tax year, the partnership must adopt the same tax year as that of its principal capital holder. Where neither condition is met, a partnership must use the calendar year. A Limited Liability Company reporting as a partnership has the same tax year as a majority of its partners.
References: - Publication 541 (PDF), Partnerships
- Publication 542 (PDF), Corporation
- Publication 334 (PDF), Tax Guide for Small Business
- Entities: Sole Proprietor, Partnership, Limited Liability Company/Partnership (LLC/LLP), Corporation, Subchapter S Corporation
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