| 1 | Special taxes imposed on S corporations. |
| Passive investment income (PII) tax Built-in gains (BIG) tax LIFO recapture General business credit recapture | |
| 1.01 | PASSIVE INVESTMENT INCOME(PII) TAX |
| Passive investment income includes gross receipts from royalties, rents, dividends, interest, and annuities. If an S corporation has pre-S corporation E&P (from the period it was a C corporation) at the end of a tax year and its passive investment income is more than 25% of its gross receipts, the S corporation may be subject to a tax @ 21% on excess net passive income. | |
| Net Passive Income does not include net operating losses. Net Passive income is PII reduced by expenses directly attributable to its production | |
| PII Tax liability is allocated to the PII Items and reduces the amount of the item passed through to shareholders. S Corporations are required to make estimated payments of PII Tax | |
| 1.02 | BUILT IN GAINS TAX |
| If, within 5 years from the date a corporation converts from C to S status, an S corporation sells a property with appreciation inherent (FMV of property is greater than AB of property on the date of conversion), the S corporation is subject to a tax of 21% on the net gain recognized (up to the amount of built-in gain on conversion). | |
| Built in Gain Tax is applicable for C Corp converted into S Corp after 1986 | |
| The tax liability is passed through as a loss, pro rata to its shareholders – a) It reduces basis in each shareholder’s stock and any AAA balance b) Subchapter CE&P are not reduced by BIG Tax Liability | |
| S Corporation are required to make estimated payment of BIG Tax | |
| Shareholders report their share of individual gains reduced by taxes paid by S Corp that are attributable to such gains. | |
| 1.03 | LIFO RECAPTURE |
| Any excess of the FIFO inventory value over the LIFO Inventory value at the close of the last tax year of C Corporation status is gross incom to a corporation that used the LIFO method to inventory goods. | |
| Basis of inventory is increased by the amount on which the recapture tax is imposed | |
| The recapture income is spread over 4 years: the last C Corp Year and the first 3 years of S Corp |