By: Amanda Wilson
As I previously discussed (here), the federal tax due date for partnership and corporate tax returns changed a few years ago. Partnership and S corporation tax returns are due a month earlier on March 15th, while corporate tax returns are now due a month later on April 15th. In other words, if you were thinking you have until April 15th to file your partnership or S corporation tax returns, you need to file for an extension tomorrow.
By: Amanda Wilson
An S corporation is a popular tax vehicle, as it allows for a single layer of tax instead of the double layer of tax imposed on regular corporations. Instead of the S corporation paying tax, the taxable income of the S corporation passes through to the shareholders and is reported on the shareholders’ personal tax returns. The S corporation can generally then distribute the accompanying profits to the shareholders free of federal tax.
To avoid corporations converting to S corporations and then selling their assets (thereby taking advantage of the single level of tax imposed on S corproations), the Internal Revenue Code imposes a 10 year built-in gains tax on S corporations. If an S corporation sells assets within this 10-year period, it pays the normal corporate level tax to the extent any of the gain on the sale was already built-into the asset at the time it made the S election. For example, assume a corporation has an asset with a fair market value of $10 at the time it converts to an S corporation. If the corporation later sells the asset for $12 within the 10 year built-in gain period, the S corporation would pay corporate level tax to the extent that it had gain attributable to the first $10 of the sales price.
A recent proposal in the House of Representatives would permanently reduce this 10-year period to 5 years. This change is proposed to be retroactive to January 1, 2015. This change, if it makes its way into law, would be great news for S corporations as well as real estate investment trusts (which are subject to a comparable built-in gains tax). Stay tuned!
If you are an employee of a company for which you are also an owner, you should consider reviewing your current compensation for its reasonableness. It is very common for small businesses to be formed as Subchapter S corporations. In these types of business, owners are also often employees of the business. The owners may be willing to take a smaller salary because they will eventually receive the business profits anyway. If this describes your business, be careful. The Internal Revenue Service continues to focus on whether compensation paid to employee owners is fair and reasonable when auditing small businesses, particularly S corporations.
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