§1363 — Title 26 Internal Revenue Code | U.S. Code

Summary

An S corporation normally does not pay the regular corporate income tax. Its taxable income is figured much like an individual’s, but some items must be shown separately, certain deductions are not allowed to the corporation, some corporate rules about organization costs and special adjustments still apply, and a special rule can apply if the company was a regular (C) corporation in any of the 3 years before the S election. Most tax elections for items from an S corporation are made by the corporation itself. Two exceptions — elections about mining exploration costs and elections about foreign taxes — must be made by each shareholder. If a company used the LIFO inventory method as a C corporation before becoming an S corporation, any extra tax because of switching is called the “LIFO recapture amount” (the FIFO inventory amount minus the LIFO amount). That extra tax must be paid in 4 equal yearly installments. The first installment is due with the tax return for the last C year (no extensions), and the next three are due with the returns for the next three years. The law fixes how those due dates affect interest. Inventory terms and how to count inventory amounts are set by the rules about LIFO, retail valuation, or cost-or-market, and the law limits certain group and other technical rules for this recapture tax.

Title 26, §1363

Internal Revenue Code — Source: USLM XML via OLRC

(a)Except as otherwise provided in this subchapter, an S corporation shall not be subject to the taxes imposed by this chapter.

(b)The taxable income of an S corporation shall be computed in the same manner as in the case of an individual, except that—

(1)the items described in section 1366(a)(1)(A) shall be separately stated,

(2)the deductions referred to in section 703(a)(2) shall not be allowed to the corporation,

(3)section 248 shall apply, and

(4)section 291 shall apply if the S corporation (or any predecessor) was a C corporation for any of the 3 immediately preceding taxable years.

(c)(1)Except as provided in paragraph (2), any election affecting the computation of items derived from an S corporation shall be made by the corporation.

(2)In the case of an S corporation, elections under the following provisions shall be made by each shareholder separately—

(A)section 617 (relating to deduction and recapture of certain mining exploration expenditures), and

(B)section 901 (relating to taxes of foreign countries and possessions of the United States).

(d)(1)If—

(A)an S corporation was a C corporation for the last taxable year before the first taxable year for which the election under section 1362(a) was effective, and

(B)the corporation inventoried goods under the LIFO method for such last taxable year,

(2)(A)Any increase in the tax imposed by this chapter by reason of this subsection shall be payable in 4 equal installments.

(B)The first installment under subparagraph (A) shall be paid on or before the due date (determined without regard to extensions) for the return of the tax imposed by this chapter for the last taxable year for which the corporation was a C corporation and the 3 succeeding installments shall be paid on or before the due date (as so determined) for the corporation’s return for the 3 succeeding taxable years.

(C)Notwithstanding section 6601(b), for purposes of section 6601, the date prescribed for the payment of each installment under this paragraph shall be determined under this paragraph.

(3)For purposes of this subsection, the term “LIFO recapture amount” means the amount (if any) by which—

(A)the inventory amount of the inventory asset under the first-in, first-out method authorized by section 471, exceeds

(B)the inventory amount of such assets under the LIFO method.

(4)For purposes of this subsection—

(A)The term “LIFO method” means the method authorized by section 472.

(B)The term “inventory assets” means stock in trade of the corporation, or other property of a kind which would properly be included in the inventory of the corporation if on hand at the close of the taxable year.

(C)The inventory amount of assets under a method authorized by section 471 shall be determined—

(i)if the corporation uses the retail method of valuing inventories under section 472, by using such method, or

(ii)if clause (i) does not apply, by using cost or market, whichever is lower.

(D)Except as provided in regulations, the corporation referred to in paragraph (1) shall not be treated as a member of an affiliated group with respect to the amount included in gross income under paragraph (1).

(5)section 1367(a)(2)(D) and 1371(c)(1) shall not apply with respect to any increase in the tax imposed by reason of this subsection.

Notes & Related Subsidiaries

Editorial Notes

Amendments

2005—Subsec. (d)(5). Pub. L. 109–135 added par. (5). 1988—Subsec. (d). Pub. L. 100–647, § 1006(f)(7), struck out subsec. (d) which related to distributions of appreciated property. Subsec. (d)(4)(D). Pub. L. 100–647, § 2004(n), added subpar. (D). Subsec. (e). Pub. L. 100–647, § 1006(f)(7), struck out subsec. (e) which provided that subsec. (d) not apply to reorganizations, etc. 1987—Subsec. (d). Pub. L. 100–203 added subsec. (d) relating to recapture of LIFO benefits. 1986—Subsec. (a). Pub. L. 99–514, § 701(e)(4)(J), struck out “and in section 58(d)” after “this subchapter”. Subsec. (c)(2). Pub. L. 99–514, § 511(d)(2)(C), redesignated subpars. (B) and (C) as (A) and (B), respectively, and struck out former subpar. (A) which read as follows: “section 163(d) (relating to limitation on interest on investment indebtedness),”. Subsec. (e). Pub. L. 99–514, § 632(b), amended subsec. (e) generally, substituting “reorganizations, etc.” for “complete liquidations and reorganizations”, in heading and in text struck out reference to property in complete liquidation of the corporation. 1984—Subsec. (b)(4). Pub. L. 98–369, § 721(p), added par. (4). Subsec. (c)(2). Pub. L. 98–369, § 721(b)(1), redesignated subpars. (B) to (D) as (A) to (C), respectively, and struck out subpar. (A) which provided “subsection (b)(5) or (d)(4) of section 108 (relating to income from discharge of indebtedness),”. Subsec. (d). Pub. L. 98–369, § 721(a)(2), substituted “Except as provided in subsection (e), if” for “If”. Subsec. (e). Pub. L. 98–369, § 721(a)(1), added subsec. (e).

Statutory Notes and Related Subsidiaries

Effective Date

of 2005 Amendment Pub. L. 109–135, title IV, § 411(b), Dec. 21, 2005, 119 Stat. 2636, provided that: “The amendment made by this section [amending this section] shall take effect as if included in section 10227 of the Omnibus Budget Reconciliation Act of 1987 [Pub. L. 100–203].”

Effective Date

of 1988 AmendmentAmendment by section 1006(f)(7) of Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title. Amendment by section 2004(n) of Pub. L. 100–647 effective, except as otherwise provided, as if included in the provisions of the Revenue Act of 1987, Pub. L. 100–203, title X, to which such amendment relates, see section 2004(u) of Pub. L. 100–647, set out as a note under section 56 of this title.

Effective Date

of 1987 Amendment Pub. L. 100–203, title X, § 10227(b), Dec. 22, 1987, 101 Stat. 1330–417, provided that: “(1) In general.—Except as provided in paragraph (2) the amendment made by subsection (a) [amending this section] shall apply in the case of elections made after

December 17, 1987. “(2) Exception.—The amendment made by subsection (a) shall not apply in the case of any election made by a corporation after

December 17, 1987, and before

January 1, 1989, if, on or before

December 17, 1987—“(A) there was a resolution adopted by the board of directors of such corporation to make an election under subchapter S of chapter 1 of the Internal Revenue Code of 1986, or “(B) there was a ruling request with respect to the business filed with the Internal Revenue Service expressing an intent to make such an election.”

Effective Date

of 1986 AmendmentAmendment by section 511(d)(2)(C) of Pub. L. 99–514 applicable to taxable years beginning after Dec. 31, 1986, see section 511(e) of Pub. L. 99–514, set out as a note under section 163 of this title. Amendment by section 632(b) of Pub. L. 99–514 applicable to any distribution in complete liquidation, and any sale or exchange, made by a corporation after July 31, 1986, unless such corporation is completely liquidated before Jan. 1, 1987, any transaction described in section 338 of this title for which the acquisition date occurs after Dec. 31, 1986, and any distribution, not in complete liquidation, made after Dec. 31, 1986, with exceptions and special and transitional rules, see section 633 of Pub. L. 99–514, set out as an

Effective Date

note under section 336 of this title. Amendment by section 701(e)(4)(J) of Pub. L. 99–514 applicable to taxable years beginning after Dec. 31, 1986, with certain exceptions and qualifications, see section 701(f) of Pub. L. 99–514, set out as an

Effective Date

note under section 55 of this title.

Effective Date

of 1984 AmendmentAmendment by Pub. L. 98–369 effective as if included in the Subchapter S Revision Act of 1982, Pub. L. 97–354, see section 721(y)(1) of Pub. L. 98–369, set out as a note under section 1361 of this title.

Effective Date

Section applicable to taxable years beginning after Dec. 31, 1982, see section 6(a) of Pub. L. 97–354, set out as a note under section 1361 of this title. Applicability of Certain

Amendments

by Pub. L. 99–514 in Relation to Treaty Obligations of United StatesFor applicability of amendment by section 701(e)(4)(J) of Pub. L. 99–514 notwithstanding any treaty obligation of the United States in effect on Oct. 22, 1986, with provision that for such purposes any amendment by title I of Pub. L. 100–647 be treated as if it had been included in the provision of Pub. L. 99–514 to which such amendment relates, see section 1012(aa)(2), (4) of Pub. L. 100–647, set out as a note under section 861 of this title.

§1363 Effect of election on corporation

Summary

Title 26, §1363

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