Now that the scurrying around and worrying relative to developments impacting the Corporate Transparency Act (“CTA”) that were coming at us with laser speed are on a slow simmer, I can turn my attention back to my multi-part series on Subchapter S. Don’t worry, I am not abandoning my coverage of the CTA. I intend to report any future developments, earth-shattering or otherwise.
INTRODUCTION
At the most fundamental level, corporations with an election in effect under Code Section 1362 are flowthrough entities. Items of income, loss, deduction and credit pass through to the shareholders under Code Section 1366 on a pro-rata basis. Likewise, all operating and liquidating distributions must be made to the shareholders in strict proportion to share ownership. Unlike Subchapter K, which allows in certain circumstances special allocations of the pass-through items and disproportionate distributions, Subchapter S is not so forgiving.
These concepts seem mundane. Unfortunately, in practice, they can sometimes create havoc for the unwary.
In this Part XVI of my multi-part series on some of the not-so-obvious aspects of Subchapter S, I explore how the flowthrough of items of income, loss, deduction and credit are impacted when there are changes in the ownership of an S corporation during the taxable year.