Publication 102 - Wisconsin Tax Treatment Of Tax-Option (S) Corporations And Their Shareholders Page 6
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30Publication 102
has jurisdiction to impose these taxes on the parent tax-
changed their status for Wisconsin under sec. 71.365(4)(a),
option (S) corporation.
Wis. Stats., as described in Part VI.B. However, if an S
corporation has a QSSS, neither the corporation nor the
QSSS may elect out of Wisconsin tax-option (S) status.
When a parent corporation elects to treat a subsidiary as a
QSSS and the subsidiary is deemed to be liquidated under
IRC sections 332 and 337 for federal purposes, that same
B. Special Rules When Converting Existing Regular (C)
treatment applies for Wisconsin.
Corporations
If a tax-option (S) corporation is the sole owner of a limited
Special rules apply to regular (C) corporations that elect to
liability company (LLC) that is disregarded as a separate
be tax-option (S) corporations.
entity under IRC section 7701, the LLC is disregarded as a
separate entity for Wisconsin franchise and income tax
1. Wisconsin Built-in Gains Tax
purposes, and its income is reportable by the tax-option (S)
corporation.
Generally, regular (C) corporations electing S corpo-
ration status after 1986 are subject to a federal corporate
level tax on the “built-in gain” recognized during the
O
IV.
CORPORATIONS SUBJECT TO
first 10 years after the election is made. These corpora-
WISCONSIN TAX-OPTION (S) LAW
tions may also be subject to a Wisconsin built-in gains
tax as described in Part VII.D.2.
Corporations that are required to file Wisconsin franchise or
income tax returns and are included in the definition of a
Federal law provides special transitional relief from the
“tax-option (S) corporation,” as described in Part II.F, are
built-in gains tax for certain small corporations that
subject to Wisconsin’s tax-option (S) law.
converted to S corporation status before January 1, 1989.
This rule also applies for Wisconsin purposes. Although
the transitional relief doesn’t apply to the sale or distri-
A. Electing Tax-Option (S) Corporation Status
bution of certain assets by a qualified corporation for
federal purposes, relief is available for Wisconsin.
Under IRC section 1362, only those corporations which
Therefore, a corporation that qualifies for transitional
qualify for S corporation status and actually file an election
relief under the federal rule isn’t subject to the Wiscon-
under section 1362(a)(1) are treated as S corporations. The
sin built-in gains tax. A corporation that qualifies for
election is valid only if all persons who are shareholders on
transitional relief should attach a statement to the Form
the day on which the election is made consent to the election.
5S it files with the Wisconsin Department of Revenue.
If the stock is held as community property or if the income
from the stock is community property, the consent must be
The Wisconsin built-in gains tax also may apply to a
signed by both husband and wife. The Internal Revenue
federal S corporation that has elected not to be a tax-
Service has determined that Wisconsin’s marital property is
option (S) corporation for Wisconsin purposes and
a form of community property.
subsequently re-elects Wisconsin tax-option (S) corpora-
tion status.
A corporation may make a federal S corporation election at
any time during the preceding taxable year or at any time
2. Recapture of LIFO Benefits
during the first 2½ months of the taxable year. If the election
is made after the 15th day of the 3rd month of the taxable
year, or if any of the other conditions aren’t satisfied, the
Under federal law, a regular (C) corporation that main-
tains its inventory under the last-in, first-out (LIFO)
election won’t take effect until the first day of the following
method and elects S corporation status after Decem-
year. The same effective date applies for Wisconsin purposes
ber 17, 1987, must include in income for its last taxable
as for federal purposes.
year as a regular (C) corporation the “LIFO recapture
amount.” The LIFO recapture amount is the excess of the
To be treated as a tax-option corporation for Wisconsin, a
inventory’s value under the first-in, first-out (FIFO)
corporation isn’t required to file a separate election form
method over its LIFO value as of the close of its last year
with the Wisconsin Department of Revenue. Wisconsin’s
as a C corporation. The extra tax attributable to the LIFO
tax-option (S) law is mandatory for those corporations under
recapture amount is payable in equal installments over a
Wisconsin’s jurisdiction for franchise or income tax pur-
4-year period.
poses that have an election in effect under Subchapter S of
the Internal Revenue Code for a taxable year and haven’t
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