Taxation issues: Shareholder’s Treatment Of S Corporation Items
The tax treatment of any of S corporation items is determined at the corporate level. Generally, a shareholder is required to treat S corporation items the same way on his or her tax return as they are treated on the S corporation return.
If an item on the shareholder’s return is treated differently from the way it is treated on the S corporation return, the IRS can automatically assess taxes and penalties. It can take action to immediately collect any deficiency and penalties that result from an adjustment to the shareholder’s return to make that treatment consistent with the amount or treatment of the item on the S corporation return. However, this adjustment does not effect if the shareholder files Form 8082, with his or her return identifying the different treatment.
The shareholder need not file Form 8082 if a loss, other deduction, or investment credit is shown on Schedule K-1 (Form Number 1120S) is not reported in full on his or her return solely because the shareholder is required to limit the item, such as under the at-risk rules.
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These rules do not apply to an S corporation with five or fewer shareholders if each shareholder is a natural person or an estate (but not a passthrough shareholder) unless the corporation chooses to have them apply. There cannot be more than five shareholders at any time during the year. For S corporations, a husband and wife, and their estates are treated as one shareholder. For stock owned by tenants in common or joint tenants, each is considered a shareholder.
Pro Rata Share
Except when terminating S corporation status, each shareholder’s pro rata share of each item to be entered on Schedules K-1 is figured on a per day, per share basis. A pro rata share is calculated as follows:
(1) Divide the item by the number of days in the S corporation’s tax year (to calculate the daily amount of the issue),
(2) Multiply the daily amount of the part by the shared stock owned by the shareholder on that day (to calculate the shareholder’s per daypart, and
(3) Total the shareholder’s daily parts of the daypart amount of the item. If there is no change in shareholders or in the percentage of stock each shareholder owns during the tax year, each shareholder’s pro rata share of an item is the amount of the item times the percentage of stock held by the shareholder during the year.
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