S Corporation: A Discussion

The purpose of this research is to examine the concept and use of the Subchapter S Corporation. The attraction of the Subchapter S Corporation lies in potential federal income tax benefits. Therefore, the use of the concept must be considered within the context of federal income tax laws generally, and of the Tax Reform Act (TRA) of 1986 specifically.

A subtype of the Subchapter S corporation is the Subchapter C Corporation. On a broad level, the Subchapter S Corporation is limited to 10 shareholders, while a requirement for the Subchapter C Corporation is that at least 50 percent of the stock must be held by no more than five shareholders. In this examination, both the Subchapter S Corporation and the Subchapter C Corporation are considered. TAX LAW, AND THE SUBCHAPTER S CORPORATION

The TRA of 1986 changed taxation rates, bases of taxation, and other significant factors related to federal income taxation for individuals, partnerships, corporations, trusts, and other entities subject to federal income taxation (Tax Management, 1987, p. 15.5). These changes in the socalled rules of the game create situations wherein some taxpayers may find it beneficial to change the form of business organization under which some of their activities are conducted (Klott, 1986, pp. 44-45). Tax rates and the tax rate structure are among the most highly publicized provisions of the TRA of 1986. The prior federal income tax la

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plan. Under the prior federal income tax law, there was a minimum tax rate of 20 percent, which applied to high income individuals who, for one reason or another, would not otherwise be required to either pay any federal income taxes or to pay federal income taxes at a rate lower than 20 percent. Corporations were not subjected to a minimum tax. The TRA of 1986 extends the minimum tax concept to corporations. Under the TRA of 1986, the minimum tax for noncorporate tax payers is raised to 21 percent, while a minimum tax for corporations of 20 percent is imposed for the first time (Tax Management, 1987, p. 15.7). Interest on municipal bonds, continues to be excluded from income determination under the TRA of 1986. The users of tax shelters, however, were major losers under the changes brought about by the TRA of 1986. Under prior federal income tax law, all tax shelter paper loses were fully deductible from ordinary income. Under the TRA of 1986, such deductions will be completely phased out over time, in some instances, and deduction is restricted (as to either timing, by application against relevant income), with respect to passive activity (Tax Management, 1987, pp. 15.5-15.7). The federal income tax ch

Category: Business - S