S corporations now can have subsidiaries - but proceed with caution

Article Abstract:

The introduction of Sec 1361(b)(3) and the revision of Sec 1361(b)(2) enable S corporations to own all the stock of a subsidiary and elect to have the subsidiary taxed as part of the parent operations instead of on the separate operations of the subsidiary. However, establishing a qualified subchapter S subsidiary (QSSS) is not as simple as it seems, partly because Sec 1361(b) was enacted by Congress in a cursory fashion, which means that the law can be defined by regulations. Some guidance has been provided by the IRS through the introduction of proposed regulations on QSSSs and 80% C corporation subsidiaries. Nevertheless, certain issues remain unsettled despite these regulations. Moreover, QSSSs and 80% C subsidiaries are relatively new and are still developing. S corporations should therefore consider alternatives to this type of operations.

Public Finance Activities, Corporate Tax Administration, Subsidiary Management, Laws, regulations and rules, Subsidiary corporations, Subsidiaries, Corporate taxes, Tax administration

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A covenant not to compete still can provide tax savings to a buyer

Article Abstract:

Payments made under covenants not to compete that are struck during the sale of a business are treated as ordinary income by the seller and are deductible as a business expense by buyers. The use of covenants not to compete can enable business buyers to receive faster write-offs than afforded by an allocation of assets. Covenants are often a desirable asset from a tax planning perspective, providing a depreciable assets that is written-off faster than other business assets. Allocations to covenants are a means of avoiding the double taxation effects of a liquidation and gives buyers a depreciable intangible asset. The contract of sale should be specific regarding the allocation and provide penalties for nonadherence to the allocation.

Methods, Tax accounting

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Terminating part or all of an S corp.'s business

Article Abstract:

Shareholders planning to discontinue all or some of the business activities of a subchapter S corporation may do so through reorganizations, complete or partial liquidations, or shareholder buyouts. Unpleasant tax consequences may be avoided by selecting an approach most suited to the shareholders' goals in terminating corporate activities. Divisive reorganizations are advisable if the goal is to turn the corporation into two or more companies. Liquidation would be best if shareholders intend to end business activities. Buyouts by a redemption plan or shareholder's agreement is suggested if the shareholders wish to transfer corporate ownership to a younger generation.

Management, Taxation, Stockholders, Liquidation

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