Income
and deductions of a Subchapter S corporation are passed through to shareholders on
Schedule K-1 (Form 1120S). Subchapter S corporation items are generally allocated to
shareholders on a per-share, per-day basis.
Subchapter S corporation Item x % of Stock Owned x % of Year Owned
For purposes of the per-share per-day
allocation:
• A tax year only includes days in which
Subchapter S corporation stock is held by shareholders,
• Shareholder is considered a shareholder through the day the Subchapter S corporation
stock is
disposed of, and
• Deceased shareholder is considered a Subchapter S corporation shareholder through the day of
death.
If there is no change in shareholders or in
the percentage of Subchapter S corporation stock each shareholder owns during the tax year, each
shareholder’s pro rata share of an item is the amount of the item times
the percentage of stock owned by the shareholder during the year.
Elections To Treat Tax Year As Two Short
Years: Two elections are available for a Subchapter S corporation to allocate
income to shareholders as if the tax year consisted of two short years.
The rules apply only for purposes of allocating income. Only one tax
return is filed for the year.
1) Termination of Shareholder’s Interest:
If there is a complete termination
of a shareholder’s interest during the year, a Subchapter S corporation may
allocate that shareholder’s income as if the tax year ended on the date
of termination. This election requires consent of all shareholders,
including the Subchapter S corporation shareholder whose interest is being terminated. See
instructions to Form 1120S for details of making the election. [IRC
§1377(a)(2)]
2) Qualifying Disposition: If
a qualifying disposition takes place during the year, a Subchapter S corporation
can
elect to allocate income to shareholders as if the tax year ended on the
date of disposition. This election requires the signature of a corporate
officer. See instructions to Form 1120S for details of making the election
[Regulation §1.1368-1(g)(2)].
A qualifying disposition is:
a) Disposition by a shareholder of at least
20% of the Subchapter S corporation’s stock in any 30-day period during the tax
year,
b) Redemption of 20% or more of the of the Subchapter S corporation’s stock in any
30-day period, or
c) Issuance of stock that equals at least 25% of the previously
outstanding stock to a new shareholder(s) in any 30-day period during the
tax year.
