S corps. in rental business may avoid passive income tax

Article Abstract:

S corporations involved in the rental business may be subject to a tax liability and may even lose their S corporation status. These entities may be taxed at the highest regular corporate tax rate under Sec. 1375(a) if they have C corporation E&P by yearend and if they have "passive investment income" exceeding 25% of their gross receives. If these two conditions apply for three years in a row, they are also grounds for the automatic loss of the S status under Sec. 1362(d)(3)(A). S corporations with passive income can avoid taxation and termination by eliminating C corporation E&P or by minimizing their passive income. Subchapter C E&P can be avoided by electing to treat all distributions for the year as coming from the C corporation E&P under Sec. 1368(e)(3). Passive income can be reduced by changing the passive income ratios and limiting taxable income.

Lease and rental services industry, Lease and rental services, Passive activity (Taxation)

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S corp. debt workouts can preserve shareholders' losses

Article Abstract:

Careful tax planning can help S corporations restructuring their debt or filing for bankruptcy avoid the adverse tax consequences of debt cancellation. Tax planners should therefore familiarize themselves with the special provisions covering discharge of debt in these corporations. According to Section 61(a)(12) debt discharges can result in the taxable cancellation of debt (COD) income. However, this income may be excluded, thus lessening suspended losses of shareholders and other tax attributes of S corporations, if the conditions set forth in Section 108(a)(1) are met. Provisions relating to the reduction of tax attributes are contained in Section 108(b). An understanding of these and other Section 108 provisions as they relate to S corporation regulations should help practitioners plan more effectively for COD income in such a corporation.

Extinguishment of debts, Debt cancellation

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Bulk-sale value controls built-in inventory gains

Article Abstract:

The IRS holds that the bulk-sale value of a corporation's inventory should be the basis for the calculation of built-in gains. Moreover, it requires that the corporation consider partnership items in its account even if these were not directly incurred by the corporation. This view on inventory valuation for corporations electing for S status is enunciated in Proposal Regulations (CO-87-80). The IRS cites Property Regulations 1.1374-7(a), 1.1374-7(h) and Section 1374(d)(3) in interpreting the rules covering the treatment of inventory valuation, partnership interests and built-in gains.

Inventories

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