S Corporations: Shareholder Tax Issues (Portfolio 732)


Horacio Sobol


PricewaterhouseCoopers LLP


Samuel Starr

Special Counsel

IRS Office of Associate Chief Counsel - Pass-Through Entities

At a glance

I. Tax Treatment of Income and Losses to Shareholders
II. Shareholder Basis in Stock and Indebtedness
III. Fringe Benefits, Reasonable Compensation, and Family Allocations
IV. Buy-Sell Agreements for S Corporations and Their Shareholders


Tax Management Portfolio, S Corporations: Shareholder Tax Issues, No. 732, reviews the special tax status of S corporation shareholders. While S corporations generally avoid federal income tax at the corporate level, S corporation shareholders are taxed pro rata on the corporation's income, which is passed through to them, whether or not distributed. The character of various items passed-through to shareholders, whether separately or non-separately stated, is discussed. Adjustments to the shareholders’ stock basis and indebtedness basis are explained in detail, and practical advice in creating basis is provided.

The at-risk and passive activity loss rules are reviewed and the net investment tax impact is introduced. The impact of the alternative minimum tax at the shareholder level is summarized. Taxation of fringe benefits, qualified plans, and compensating S corporation shareholders is discussed along with practical insights. A practical discussion on S corporation shareholder buy-sell agreements is provided.

This Portfolio provides the practitioner with analysis of the taxation of S corporations and their shareholders. In addition, the Portfolio explains the relationship of the S corporation provisions with other areas of the tax laws, and illustrates the advantages and difficulties of a corporation operating in S corporation form.
For additional discussion of S Corporations, see 730 T.M., S Corporations: Formation and Termination, and 731 T.M., S Corporations: Corporate Tax Issues.

This Portfolio may be cited as Sobol and Starr, 732 T.M., S Corporations: Shareholder Tax Issues.

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