Publication 102 - Wisconsin Tax Treatment Of Tax-Option (S) Corporations And Their Shareholders Page 18

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Publication 102
further limited to that portion of the federal itemized
income. Therefore, he can’t actually deduct any portion of the
$1,000 of expenses passed through from the corporation.
deduction which is attributable to Wisconsin using
apportionment or separate accounting, as appropri-
For Wisconsin purposes, the shareholder cannot claim any
ate.
portion of the $1,000 either in the Wisconsin itemized deduc-
tion credit or as a subtraction modification.
Example 1: A multistate tax-option (S) corporation, whose
sole shareholder is a Wisconsin resident, paid $15,000 of
Example 4: A tax-option (S) corporation has two Wisconsin
investment interest expense and made $2,000 of charitable
resident shareholders, and each owns 50% of the corporation’s
contributions in 1997. These amounts pass through to the
stock. In 1997, the corporation pays $200 per month, for a
shareholder and are deductible on her federal Schedule A as
total of $2,400, of health insurance premiums on behalf of
itemized deductions. The shareholder determines that, due to
Shareholder A, who is actively involved in the management of
the federal limitations on the deductibility of investment
the business, and nothing for Shareholder B, who is merely a
interest, only $10,000 of the investment interest expense is
passive investor. Shareholders A and B are “2% shareholders,”
deductible on federal Schedule A. She may deduct the entire
which are shareholders who own more than 2% of the corpora-
$2,000 of charitable contributions because her total contribu-
tion’s stock.
tions don’t exceed the federal limits.
For federal and Wisconsin purposes, qualifying health insur-
For Wisconsin purposes, the shareholder may either (a) use
ance costs paid on behalf of the 2% shareholder-employes are
these deductions in computing her Wisconsin itemized deduc-
deductible in computing the corporation’s net income. There-
tion credit or (b) subtract them as modifications to arrive at her
fore, one-half of the $2,400 expense, or $1,200, is allocated to
Wisconsin adjusted gross income.
each shareholder. The shareholders share the expense equally
since the health insurance premiums paid on behalf of the 2%
If the shareholder includes these deductions in her itemized de-
shareholders are treated in the same manner as any other
duction credit, she may claim $10,000 of the investment
deductible expense of the corporation.
interest expense and the $2,000 of charitable contributions (the
amounts deductible federally). Alternatively, the shareholder
In addition, the $2,400 is taxable income to Shareholder A for
may take $10,000 of the investment interest expense and the
both federal and Wisconsin purposes. Under federal law, cer-
$2,000 of charitable contributions as subtraction modifications
tain fringe benefits aren’t available to 2% shareholders. One of
in computing her Wisconsin adjusted gross income.
these benefits is the exemption under IRC section 106 for
contributions by an employer to an accident or health plan.
Example 2: Assume the same facts as in Example 1, except
Therefore, 2% shareholder-employes must report the health
that the tax-option (S) corporation’s sole shareholder is a
insurance premiums paid by the corporation on their behalf as
nonresident of Wisconsin. The corporation’s Wisconsin
taxable income for federal and Wisconsin purposes.
apportionment percentage is 30%.
Finally, for federal income tax purposes, Shareholder A may
If the shareholder chooses to use these expenses in computing
deduct 40% of the health insurance premiums paid on his
her Wisconsin itemized deduction credit, she may include
behalf as an adjustment to federal adjusted gross income as
$10,000 of investment interest expense and $2,000 of charita-
provided in IRC section 162(l), and use the balance as a federal
ble contributions. (Note that a nonresident of Wisconsin must
itemized deduction. For Wisconsin purposes, Shareholder A
prorate the itemized deduction credit based on the ratio of
may subtract the remaining 60% of the premiums paid on his
Wisconsin adjusted gross income to federal adjusted gross
behalf (for a total deduction of 100% of the premiums) in
income.)
computing Wisconsin net income, and use none of the premi-
ums in computing the Wisconsin itemized deduction credit.
If the shareholder chooses to treat these items as subtraction
modifications, she may subtract the following amounts: invest-
3. Corporate Distributions
ment interest expense of $3,000 (30% x $10,000) and charita-
ble contributions of $600 (30% x $2,000). In this case, her
In general, Wisconsin resident shareholders must include
subtraction modifications are limited to that portion of the
deductions attributable to Wisconsin using the corporation’s
all distributions received from a tax-option (S) corpora-
apportionment percentage.
tion, other than from net income already taxed to the
shareholders, in their Wisconsin adjusted gross incomes
Example 3: In 1997, a tax-option (S) corporation incurs
in the year of receipt. Dividend distributions received by
$1,000 of expenses in the production of investment income.
nonresident shareholders aren’t taxable by Wisconsin.
For federal purposes, the corporation’s sole shareholder may
take these separately stated expenses as miscellaneous itemized
Past and current differences in the computation of a tax-
deductions, subject to the 2% limit on such deductions. The
option (S) corporation’s federal and Wisconsin income,
shareholder determines that his miscellaneous itemized
losses, and deductions, may create a difference between
deductions don’t exceed 2% of his federal adjusted gross
16

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