S election does not remove relevance of SFAS No. 109

Article Abstract:

A C corporation considering to convert to an S corporation status to attain pass-through treatment for business income or losses should be aware that Statement of Financial Accounting Standard No 109, 'Accounting for Income Taxes,' would still apply after the transition. S corporations are not liable to federal income tax only if they have had that status upon their formation. However, this does not hold true if S corporations were formerly C corporations. The converting corporation cannot realize deferred tax asset in the future but is likely to be burdened with deferred tax liability in the future. The deferred tax liability may still persist due to the application of the built-in gains tax under Sec 1374, which could lead to financial troubles for the converting C corporation. Nevertheless, it can still retain a deferred tax asset equal to or even greater than a deferred tax liability.

Public Finance Activities, Corporations, Corporate Income Taxes, Management, Deferred tax (Accounting)

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S corporations allow flexibility in dealing with passive activities

Article Abstract:

The passive loss limitations of the Tax Reform Act of 1986 limit taxpayers' ability to deduct losses from passive activities that exceed their income. Losses are carried forward until a taxable year in which the taxpayer has income or eliminates the loss-producing asset. The structure of the S corporation provides taxpayers with flexibility for handling passive losses. The S corporation structure is also effective for groups of investors with different levels of involvement who wish to gain different treatment pertaining to income and losses realized through an S corporation. When planning for passive losses, planners must consider three issues: the number of entities in which related activities take place, the differences in share ownership, and the timing of activity dispositions.

Analysis, Loss deductions, Carryforward losses, Carryover losses

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