Publication 102 - Wisconsin Tax Treatment Of Tax-Option (S) Corporations And Their Shareholders Page 17
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30Wisconsin Tax Treatment of Tax-Option (S) Corporations and Their Shareholders
required for taxable years before 1979 are used to eliminate
taxed income.” Therefore, the shareholder won’t include the $1,000
in 1997 federal income. For Wisconsin, the shareholder must add
all items of S income or loss and to include the amount of
$1,000 to 1997 federal adjusted gross income as a transitional
any taxable distributions.
adjustment on Form 1, Schedule 1.
The tax-option (S) corporation must give a copy of Wiscon-
C. Modifications
sin Schedule 5K-1 to each shareholder showing the items of
income, loss, and deduction to be reported on the share-
The tax-option (S) corporation must compute its items of
holder’s Wisconsin income tax return, including any applica-
income, loss, and deduction for Wisconsin purposes as
ble individual transitional adjustments or modifications, as
prescribed by the Wisconsin Statutes. If Wisconsin and
described below. In addition, the corporation must give each
federal tax-option items differ, modifications are required so
shareholder a copy of the “Shareholder’s Instructions for
that Wisconsin corporate income is taxed to shareholders at
1997 Schedule 5K-1.”
least once, but not more than once. Modifications which may
be necessary in given situations are explained in the follow-
A. Corporate Income Reportable by Shareholders
ing sections.
Each shareholder must report his or her share of each item of
1. Differences Between Federal and Wisconsin Tax-
tax-option (S) corporation income, loss, and deduction.
Option (S) Items
Generally, the shareholder’s share of each tax-option item is
figured on a per day, per share basis. If there is no change in
Generally, items of income, loss, and deduction are
the percentage of stock each shareholder owns during the
computed under the Internal Revenue Code in effect for
corporation’s taxable year, each shareholder’s share of tax-
Wisconsin purposes. The character of individual items of
option items is the amount of the item times the share-
income and expense passes through to the shareholders.
holder’s percentage of stock ownership for the taxable year.
However, intangible income attributable to Wisconsin,
except interest on United States government obligations,
If a shareholder terminates his or her interest in a tax-option
bonds issued by the government of Puerto Rico, and
(S) corporation during the taxable year, the corporation, with
certain state and local government bonds, retains its
the concurrence of all affected shareholders, may elect, under
character as business income and is taxable to nonresi-
IRC section 1377(a)(2), to allocate all tax-option items as if
dent shareholders. As explained in Part VII.C.2, addi-
the corporation’s taxable year consisted of 2 taxable years,
tions to or subtractions from the federal amount of tax-
the first of which ends on the date of the shareholder’s
option items may be necessary to determine the amounts
termination. To make the election, the corporation must file
reportable under Wisconsin law. Indicate a shareholder’s
a statement of election with its return for the taxable year of
share of such modifications on the shareholder’s Wis-
election and attach a statement of consent signed by all
consin Schedule 5K-1.
affected shareholders. If making the election, write “Section
1377(a)(2) Election Made” at the top of each Schedule 5K-l.
2. Federal Itemized Deductions
B. Individual Transitional Adjustments
For Wisconsin purposes, shareholders of a tax-option (S)
corporation may treat tax-option items that are deduct-
The distribution in 1979 and thereafter of a corporation’s
ible federally as itemized deductions in either of the
earnings and profits accumulated as of the end of its 1978
following ways:
taxable year may or may not be included in its shareholders’
federal income, depending upon whether or not the earnings
a. As deductions which may be includable in the
and profits were taxed federally to the shareholders in years
Wisconsin itemized deduction credit. Include the
before 1979. However, all dividends received by Wisconsin
amount that is deductible as a federal itemized
resident shareholders from pre-1979 earnings and profits
deduction in the itemized deduction credit to the
are subject to the Wisconsin tax. Therefore, a transitional
extent permitted under Wisconsin law.
adjustment is required for distributions from pre-1979
federal “undistributed” and “previously taxed” income
b. As modifications which are subtracted from federal
which are not included in federal income when received by
adjusted gross income to arrive at Wisconsin ad-
a resident shareholder.
justed gross income. Treat the amount that is deduct-
ible federally as a subtraction modification. How-
Example: In 1997, $1,000 of pre-1979 earnings and profits is
ever, for a nonresident or part-year resident share-
distributed to a resident shareholder. For federal income tax
holder of a multistate corporation, the subtraction is
purposes, this amount is a nontaxable distribution of “previously
15
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