S Corporations – Special Taxes

1 Special taxes imposed on S corporations.
Passive investment income (PII) tax
Built-in gains (BIG) tax
LIFO recapture
General business credit recapture
1.01 PASSIVE INVESTMENT INCOME(PII) TAX
Passive investment income includes gross receipts from royalties, rents, dividends, interest, and annuities. If an S corporation has pre-S corporation E&P (from the period it was a C corporation) at the end of a tax year and its passive investment income is more than 25% of its gross receipts, the S corporation may be subject to a tax @ 21% on excess net passive income.
Net Passive Income does not include net operating losses. Net Passive income is PII reduced by expenses directly attributable to its production
PII Tax liability is allocated to the PII Items and reduces the amount of the item passed through to shareholders. S Corporations are required to make estimated payments of PII Tax
1.02 BUILT IN GAINS TAX
If, within 5 years from the date a corporation converts from C to S status, an S corporation sells a property with appreciation inherent (FMV of property is greater than AB of property on the date of conversion), the S corporation is subject to a tax of 21% on the net gain recognized (up to the amount of built-in gain on conversion).
Built in Gain Tax is applicable for C Corp converted into S Corp after 1986
The tax liability is passed through as a loss, pro rata to its shareholders  – a) It reduces basis in each shareholder’s stock and any AAA balance b) Subchapter CE&P are not reduced by BIG Tax Liability
S Corporation are required to make estimated payment of BIG Tax
Shareholders report their share of individual gains reduced by taxes paid by S Corp that are attributable to such gains.
1.03 LIFO RECAPTURE
Any excess of the FIFO inventory value over the LIFO Inventory value at the close of the last tax year of C Corporation status is gross incom to a corporation that used the LIFO method to inventory goods.
Basis of inventory is increased by the amount on which the recapture tax is imposed
The recapture income is spread over 4 years: the last C Corp Year and the first 3 years of S Corp

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