BUSINESS STOCKHOLDER ELECTION TO REPORT CORPORATE INCOME

Articles In This Section:

· Form of business and financing

· BUSINESS ADVANTAGES OF OPERATING AS A SOLE PROPRIETOR

· BUSINESS DISADVANTAGES OF OPERATING AS A SOLE PROPRIETOR

· BUSINESS FINANCING

· WHAT TYPES OF BUSINESS LOANS

· LOANS FOR THE BUSINESS

· A LINE OF CREDIT FOR THE BUSINESS

· How a Sole Proprietorship is Taxed

· BUSINESS ADVANTAGES OF THE PARTNERSHIP FORM

· BUSINESS DISADVANTAGES OF THE PARTNERSHIP FORM

· THREE RULES AS BUSINESS PARTNERS

· BUSINESS TAXATION

· BUSINESS CORPORATION

· BUSINESS DISADVANTAGES OF THE CORPORATE FORM

· BUSINESS CORPORATE FINANCING

· BUSINESS STOCKHOLDER ELECTION TO REPORT CORPORATE INCOME

· MAKING THE BUSINESS ELECTION

· HOW THE BUSINESS ELECTION IS LOST

· BUSINESS ADVANTAGES AND DISADVANTAGES OF STOCKHOLDER REPORTING OFCORPORATE INCOME

You can now have all the legal advantages of a corporation and avoid corporate tax reporting. The election can be used as long as it reduces taxes—for as little as one year—or indefinitely. How the election works. You, as a stockholder, agree to report on your personal tax return as dividends your share of the corporation's taxable income. However, you cannot reduce this type of dividend income by the dividend exclusion, the dividend credit or the retirement income credit. But you can report your share of corporate capital gains on your Schedule D as capital gains. You can also use your share of corporate operating losses to reduce your other personal income. If the loss exceeds your income, you can use the excess as a net operating loss carryover to other years as if you were a sole proprietor or partner. But you cannot carry back to years before 1958. Nor can you deduct capital losses incurred by the company.

In addition to reporting your share of company income or loss, you also adjust your cost or basis for the stock. You increase yur basis by the corporation's income you report, whether or not distributed to you. However, when this income is distributed, you reduce your basis. You also reduce basis by company losses you report. If these reduce your basis to zero, further losses are used to decrease any debts the corporation owes you. When the cost basis of your stock and debts has been eliminated, you cannot deduct any further corporate losses on your return. These are completely wasted unless you make a further investment in your company. The corporation files an information return instead of its regular corporate return. It does not have to pay any tax for the years the election is in force. Who can make the election? If your company meets the following tests you can make the election:

Stock test.

Your company is a domestic corporation which is not a member of an affiliated group and has

1. No more than 10 stockholders, all of whom must agree to the election. Where stock is held jointly, you must commit the joint owners as one stockholder.

2. Stockholders which are either individuals or estates.

3. No non-resident alien stockholders.

4. One class of stock. You cannot make the election if your company has common and preferred stock outstanding. As long as only common is outstanding, you can take advantage of the election. But you lose the election when you issue preferred.