Publication 102 - Wisconsin Tax Treatment Of Tax-Option (S) Corporations And Their Shareholders Page 27

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Wisconsin Tax Treatment of Tax-Option (S) Corporations and Their Shareholders
for distributions, over the increases in the AAA for the
Example 1: A calendar-year corporation with accumulated
earnings and profits at the end of 1996 elects to be an S corporation
taxable year.
for 1997 and that election applies for Wisconsin purposes. In 1997,
it has federal nonseparately stated income of $30,000, including a
b. A nontaxable distribution of the shareholder’s Wiscon-
$150 deduction for the temporary recycling surcharge, and
sin “previously taxed undistributed income” from the
municipal bond interest of $5,000. The corporation’s two share-
1979 taxable year through the last taxable year begin-
holders each have a Wisconsin stock basis of $4,000 on January 1,
ning before January 1, 1983, but not in excess of the
1997. The corporation distributes $35,000 on December 31, 1997.
shareholder’s Wisconsin stock basis after applying the
distributions in a above.
Each shareholder will include $17,575 of tax-option (S) corporation
income in her 1997 Wisconsin income ($15,000 of nonseparately
c. A taxable dividend to the extent of accumulated earnings
stated income for federal tax purposes plus $75 of nondeductible
and profits.
temporary recycling surcharge and $2,500 of separately stated
municipal bond interest, which are reported as addition modifica-
tions on her Wisconsin return). Her Wisconsin basis will increase
d. A nontaxable distribution of exempt income to the extent
by $17,500 ($17,575 of income minus $75 of nondeductible
of the Wisconsin OAA, but not in excess of the share-
expenses). The Wisconsin AAA will increase to $35,000 ($35,150
holder’s Wisconsin stock basis after applying the
of income minus $150 of nondeductible expenses). The distribution
distributions in a and b above.
of $35,000 is nontaxable and will decrease the Wisconsin AAA to
zero and each shareholder’s stock basis to $4,000.
e. A nontaxable return of capital to the extent of the
shareholder’s Wisconsin stock basis after applying the
It should be noted that for federal tax purposes, only $30,000 of the
distributions in a, b, and d above.
distribution is nontaxable. The balance of the distribution is taxable
as a dividend since there were accumulated earnings and profits at
the end of 1996, and the federal AAA isn’t increased by tax-exempt
All non-dividend distributions in excess of basis are treated
income (the $5,000 of municipal bond interest is exempt from
as taxable gains from the sale or exchange of property.
federal taxation).
If a tax-option (S) corporation makes more than one distribu-
Example 2: Assume the same facts as in Example 1, except that the
tion to its shareholders during its taxable year and the total
corporation distributes only $30,000 on December 31, 1997.
distribution exceeds the amount in the Wisconsin AAA at the
end of the corporation’s taxable year determined without
Each shareholder will include $17,575 of tax-option (S) corporation
regard to any net negative adjustment for the taxable year,
income in her Wisconsin income. Her Wisconsin basis will increase
allocate the amount in the Wisconsin AAA among the
by $17,500. The Wisconsin AAA will increase to $35,000. The
distributions on a proportionate basis.
$30,000 distribution is nontaxable and will decrease the Wisconsin
AAA to $5,000 and each shareholder’s basis to $6,500.
The tax-option (S) corporation may elect, with the consent of
its affected shareholders, to modify the ordering rules for
For federal purposes, $15,000 of nonseparately stated S corporation
income is includable in each shareholder’s federal income. Each
distributions as follows:
shareholder’s federal basis will increase by $17,500 because tax-
exempt income is included for this purpose. The $30,000 distribu-
To distribute accumulated earnings and profits before
tion, which is nontaxable, will decrease the federal AAA to zero
making distributions from the Wisconsin AAA.
and each shareholder’s federal basis by $15,000.
To forgo distributions of previously taxed income.
Example 3: A Delaware corporation, which had been engaged in
business solely in Florida, transfers its operations and begins doing
If a Subchapter S election is revoked or terminated, distribu-
business in Wisconsin during 1997. The corporation’s sole
tions of money during the post-termination transition period
shareholder becomes a Wisconsin resident on January 1, 1997. For
by the former tax-option (S) corporation to its shareholders
1997, the corporation has net income of $25,000 for both federal
and Wisconsin purposes. The corporation distributes $40,000 in
are nontaxable to the extent of the corporation’s Wisconsin
cash to its shareholder on December 31, 1997. The corporation’s
AAA, but not in excess of a shareholder’s stock basis. These
federal AAA has a $20,000 balance on January 1, 1997. Since the
nontaxable distributions reduce the adjusted basis of the
corporation didn’t do business in Wisconsin before 1997, its
shareholder’s stock. Alternatively, the corporation may elect,
Wisconsin AAA has a zero balance on January 1, 1997.
with the consent of its affected shareholders, to have distri-
butions of money treated as dividends to the extent of the
For federal income tax purposes, the shareholder reports the
corporation’s accumulated earnings and profits.
$25,000 of 1997 net income. The $25,000 increases the federal
AAA to $45,000. The $40,000 distribution decreases the federal
25

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