SUBCHAPTER S CORP.   Term Paper ID:16741 Click to get this paper

Essay Subject: Concept & applications of this corp. alternative with respect to 1986 Tax Reform Act & potential tax benefits.... More...

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Paper Abstract: Concept & applications of this corp. alternative with respect to 1986 Tax Reform Act & potential tax benefits. Paper Introduction: INTRODUCTION The purpose of this research is to examine the concept and use of the Subchapter S Corporation. The attraction of the Subchapter S Corporation lies in potential federal income tax benefits. Therefore, the use of the concept must be considered within the context of federal income tax laws generally, and of the Tax Reform Act (TRA) of 1986 specifically. A subtype of the Subchapter S corporation is the Subchapter C Corporation. On a broad level, the Subchapter S Corporation is limited to 10 shareholders, while a requirement for the Subchapter C Corporation is that at least 50 percent of the stock must be held by no more than five shareholders. In this examination, both the Subchapter S Corporation and the Subchapter C Corporation are considered. Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. (1986). Under the TRA of1986, the minimum tax for non-corporate tax payers is raised to 21 percent,while a minimum tax for corporations of 2 percent is imposed for the firsttime (Tax Management, 1987, p. 36.6). Washington: The Bureau of National Affairs.----------------------- 9 With the application of the minimum tax concept to corporationsunder the provisions of the TRA of 1986 (at virtually the same rate as thatapplied to individuals), this incentive no longer exists. (1987). All consumer interest expenses weredeductible under the prior federal income tax law. 44-45). Tax rates andthe tax rate structure are among the most highly publicized provisions ofthe TRA of 1986. Washington: U. (1985). 34.4). The TRA of1986 extends the minimum tax concept to corporations. (1986, March 2).The New York Times Financial Planning Guide. By contrast, a special rule included in the TRA of 1986 for closelyheld C corporations, with respect to passive activity restrictions on lossrecognition, provides a means for some tax payers to continue to receivethe benefits of tax shelters, through retention of the C type corporationform of organization (Tax Management, 1987, p. 34.4). 8-9). Ona broad level, the Subchapter S Corporation is limited to 1 shareholders,while a requirement for the Subchapter C Corporation is that at least 5 percent of the stock must be held by no more than five share-holders. 17.9). The attraction of the Subchapter S Corporationlies in potential federal income tax benefits; therefore, the use of theconcept was considered within the context of federal income tax lawsgenerally, and of the Tax Reform Act (TRA) of 1986 specifically. The attraction of the Subchapter S Corporationlies in potential federal income tax benefits. Similar (but differing in important aspects) federalincome tax benefits are available to Sub-chapter C Corporationshareholders. The prior tax rate structure included 15 separate marginal income taxbrackets for single filers and 14 such brackets for joint filers, in theindividual category, where the TRA of 1986 reduces the number of categoriesto two, for either group (Bernstein, 1986, p. 626; Tax Management, 2987, p. References Bernstein, P. Roundtable: 3 experts look ahead on tax plans. Under the prior federal incometax law, tax payers were permitted to deduct from income that amount ofmedical expenses which exceed five-percent of the tax payer's adjustedgross income. A sub-type of the Subchapter S corporation is the Sub-chapter C Corporation. The New YorkTimes Financial Planning Guide. The TRA of 1986, when its provisions becomefully effective, caps individual rates at 28 percent, and corporate ratesat 34 percent (Bernstein, 1986, p. 34.4). INTRODUCTION The purpose of this research is to examine the concept and use of theSubchapter S Corporation. 15.7). The combined impact of the changes inthe tax rates, tax rate structure, and personal exemptions will cause areduction of federal income tax liability for individuals with taxableincomes under $12, and for individuals with taxable incomes in excess of$145,32 (Roundtable, 1986, pp. (Ed.). The prior federal income tax law permitted the deduction of charitablecontributions to the full extent of such deductions. S. A sub-type of the Subchapter S corporation is the Sub-chapter CCorporation. The TRA of 1986 reduced corporate tax brackets from five to three(Tax Management, p. (1986, June 1). Such election permits taxpayers to receive the advantages of limited liability (through thecorporate form of organization), while taking advantage of individual taxrates (in those instances where individual tax rates are lower than thosefor corporations). Under the prior federal income tax law, there was a minimum tax rateof 2 percent, which applied to high income individuals who, for one reasonor another, would not other-wise be required to either pay any federalincome taxes or to pay federal income taxes at a rate lower than 2 percent. The prior federal income tax law permitted taxpayers to deduct mortgage interest on both primary and secondary homes.The TRA of 1986 retains the mortgage interest deduction for primary homes. 626; TaxManagement, 2987, p. Under prior federal income tax law, individuals were permitted todeduct up to $2,25 per year from federal income taxes, for contributionsthey make to an individual retirement account (IRA). The provisions of the TRA of 1986 provide incentives to bothswitch to and to switch away from the corporate form of businessorganization. APPLYING THE SUBCHAPTER S CORPORATION CONCEPT The provisions of the TRA of 1986 provide incentives to both switch toand to switch away from the corporate form of business organization.Business operations organized as S type corporations for federal income taxpurposes have the option of electing to be taxed as partnerships (whereincorporate shareholders are taxed as individuals, and the S corporationitself is not subject to federal income tax). Detailed analysis of the tax reformact of 1986. CONCLUSION The purpose of this research was to examine the concept and use of theSubchapter S Corporation. Such tax payerscould, thus, liquidate their C type corporation, and reorganize as apartnership, or as a Subchapter S Corporation. The prior federal income tax law permitted the taxationof marginal income for individuals at a top rate of 5 percent, and forcorporations at a top rate of 46 percent (Bernstein, 1986, p. Government Printing Office. The prior federal income tax law permitted a $1, 8 exemption fromincome for each tax payer, spouse, and dependent, in arriving at taxableincome. The TRA of 1986limits this deduction to those individuals who do not have access to anemployment-related pension plan. The TRA of 1986 raised the thresh-hold to eight percent ofthe tax payer's adjusted gross income. Tax payers with taxable incomesbetween $12, and $145,321 will either be exposed to an income taxliability comparable to that under the prior federal income tax law, or toa higher income tax liability (pp. Anticipating a new tax law. The minimum taxunder the TRA of 1986 is applied to all corporations, including SubchapterS corporations, and Subchapter C corporations. The prior federal income tax law permittedthe full deduction of state and local taxes in the determination of taxableincome (1954 International Revenue Code, 1985, p. Klott, G. The TRA of 1986retained this deduction for those tax payers who itemize their deductions,but eliminated it for nonitemizers. Under the prior federal income tax law, one incentive to organize as aclosely held C corporation was the ability to avoid the minimum taxliability. Under the TRA of 1986, such deductionswill be completely phased out over time, in some instances, and deductionis restricted (as to either timing, by application against relevantincome), with respect to passive activity (Tax Management, 1987, pp. The elimination of special tax treatment for capital gains alsoprovides and incentive for some tax payers to switch from a C corporationtype of organization to a partnership, or to a Subchapter S Corporation.Depending upon the level of income, capital gains may be taxed as high as34 percent under a C corporation form of organization, where the maximumapplicable tax under a partnership (at individual rates) would be 28percent. In other instances, a closely held Ctype corporation may provide a lower overall tax federal income taxliability, than would partnership income taxed at individual rates. These changes in the so-called rules of the game create situations wherein some taxpayers may findit beneficial to change the form of business organization under which someof their activities are conducted (Klott, 1986, pp. Such deductionsare severely limited under the TRA of 1986. In this examination, both the Subchapter S Corporation andthe Subchapter C Corporation are considered.TAX LAW, AND THE SUBCHAPTER S CORPORATION The TRA of 1986 changed taxation rates, bases of taxation, and othersignificant factors related to federal income taxation for individuals,partnerships, corporations, trusts, and other entities subject to federalincome taxation (Tax Management, 1987, p. The TRA of 1986 raised thispersonal exemption significantly. Under the prior federal income tax law, capital gains were taxed atthe rate or 2 percent. 1954 Internal Revenue Code, As Revised. Special rates for capital gains are eliminatedunder the TRA of 1986. (1985). 8-9). 234). NewYork: Ballantine Books. In these instances,it would prove beneficial (in the context of federal income tax liability)for shareholders to retain the Subchapter C Corporation form oforganization, as opposed to switching to either a partnership or to aSubchapter S Corporation form of organization. A closely held C type corporation musthave 5 percent stock ownership by five or fewer individuals. In other instances, a closely held C type corporation may provide alower overall tax federal income tax liability, than would partnershipincome taxed at individual rates. Tax Management, Inc. Internal Revenue Service. Under the TRA of 1986,only interest paid on investments is deductible over the long-term, withall other consumer interest deductions being phased-out. Inthis examination, therefore, both the Subchapter S Corporation and theSubchapter C Corporation were considered. For most conditions, it will likely behoove shareholders inSubchapter C corporations to switch to either a partnership form oforganization, or to a Subchapter S Corporation form of organization. Undermost conditions, it will likely prove advantageous for shareholders inSubchapter S corporations to retain their status under this organizationalform. The official IRS tax guide. W. Thus, the Subchapter S Corporation would, in such a situation, bea superior organizational form to the Subchapter C Corporation. Therefore, the use of theconcept must be considered within the context of federal income tax lawsgenerally, and of the Tax Reform Act (TRA) of 1986 specifically. The users of tax shelters, however,were major losers under the changes brought about by the TRA of 1986.Under prior federal income tax law, all tax shelter paper loses were fullydeductible from ordinary income. 154.3). S type corporations must have 1 or fewer stockholders. 15.5). Another provision of the TRA of 1986 which provides a motivation forsome tax payers to switch from a C corporation form of organization to apartnership involves the pre-1989 liquidation of qualified corporations.Closely held C corporations valued at no more than $5 million may fullyavoid recognition of capital gains on long-term capital assets, if theyliquidate prior to 1989 (Tax Management, 1987, p. Interest on municipal bonds, continues to be excluded from incomedetermination under the TRA of 1986. Business operations organized as S type corporations forfederal income tax purposes have the option of electing to be taxed aspartnerships (wherein corporate shareholders are taxed as individuals, andthe S corporation itself is not subject to federal income tax). S.Government Printing Office. Federal income tax regulations.Washington: U. The major deductions applicable to individual federal income taxesunder the prior federal income tax law were those related to (1) state andlocal taxes, (2) medical expenses, (3) charitable contributions, (4)consumer interest, (5) capital gains, and (6) mortgage interest (InternalRevenue Service, 1985, p. Suchelection permits tax payers to receive the advantages of limited liability(through the corporate form of organization), while taking advantage ofindividual tax rates (in those instances where individual tax rates arelower than those for corporations). The federal income tax changes brought about through the TRA of 1986are highly relevant to the use of the Subchapter S Corporation concept.Subchapter S corporations are permitted to make an election wherebyshareholders will be taxed (for federal income tax purposes) asindividuals, as opposed to taxing the business organization as acorporation, and then taxing individual shareholders on income derived fromthe corporation. 15.5-15.7). 626; Tax Management, 2987, p.34.4). On a broad level, the Subchapter S Corporation is limited to1 shareholders, while a requirement for the Subchapter C Corporation isthat at least 5 percent of the stock must be held by no more than fiveshare-holders. Corporations were not subjected to a minimum tax. In cases where real estateimprovements constitute the primary assets, significant tax advantages mayaccrue through such termination and reorganization. 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