The Internal Revenue Code

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I am writing this letter on behalf of my client to explain the potential benefits of electing to be taxed as sub-chapter “S” to your board members. As we all know, for many companies, the most important tax decision to make is whether to elect to be treated under the provisions of sub-chapter S of the Internal Revenue Code, or not. This decision mainly depends on your company 's situation, and on analyzing the advantages and disadvantages of choosing to be treated as an S-Corporation. Generally, an S corporation does not pay corporate level tax, as C corporations do. The corporate income, whether distributed or not, is always taxed to the shareholders, and the shareholders assets and bank accounts are protected from any business…show more content…
The excess of loss can be carried back to prior years, or forward to later years. If the S corporation did not distribute income to shareholders, the shareholders would still be responsible to pay taxes on the income, according to their shares in the corporation. Also, an S corporation also has no corporate alternative minimum tax (AMT) liability, and they are subject to an accumulated earnings tax that applies to corporations that do not distribute their earnings, but it might affect the shareholders individual AMT liability. In an S corporation, shareholders receive a step-up (or step-down) in the basis of their stock, based on the earnings they obtain each year, which reduces the shareholder’s tax liability when the shares are sold. The step-up in basis helps reduce the net income subject to capital gain tax; when the shareholder receives distributed income that was taxed previously to him/her, the stock basis should be reduced. Also, any time the corporation suffers a net operating loss, the shareholder must reduce the basis of their stock to reflect the amount of loss passed through to them for their individual tax return. In order to obtain an S Corporation election, an election must be made on or before the fifteenth day of the third month of the current taxable year for it to be effective for that year. Electing Subchapter S after the fifteenth day of the third month of the
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