§1371 — Title 26 Internal Revenue Code | U.S. Code

Summary

Treat S corporations like regular C corporations when the C rules do not conflict with the special S rules. Any tax losses or credits from years when the company was a C corporation cannot be carried into years when it is an S corporation. When the company is an S corporation, no new corporate-level carrybacks or carryforwards are created, though S years still count when figuring how many years an item can be carried. Normally you do not change an S corporation’s earnings and profits. But if a C-corporation rule applies to a transaction, or a payment is treated as a dividend, the earnings and profits must be adjusted. Electing S status is treated as just changing the business form for certain tax recapture rules, and the company stays responsible for extra tax that comes from credits earned when it was not an S corporation. During a post-termination transition period, cash distributions reduce stock basis up to the company’s accumulated adjustments account (unless all distributing shareholders agree to opt out). After that period for certain terminated S corporations, distributions are split between the accumulated adjustments account and accumulated earnings and profits in the same proportion as those amounts.

Title 26, §1371

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(a)Except as otherwise provided in this title, and except to the extent inconsistent with this subchapter, subchapter C shall apply to an S corporation and its shareholders.

(b)(1)No carryforward, and no carryback, arising for a taxable year for which a corporation is a C corporation may be carried to a taxable year for which such corporation is an S corporation.

(2)No carryforward, and no carryback, shall arise at the corporate level for a taxable year for which a corporation is an S corporation.

(3)Nothing in paragraphs (1) and (2) shall prevent treating a taxable year for which a corporation is an S corporation as a taxable year for purposes of determining the number of taxable years to which an item may be carried back or carried forward.

(c)(1)Except as provided in paragraphs (2) and (3) and subsection (d)(3), no adjustment shall be made to the earnings and profits of an S corporation.

(2)In the case of any transaction involving the application of subchapter C to any S corporation, proper adjustment to any accumulated earnings and profits of the corporation shall be made.

(3)Paragraph (1) shall not apply with respect to that portion of a distribution which is treated as a dividend under section 1368(c)(2).

(d)(1)Any election under section 1362 shall be treated as a mere change in the form of conducting a trade or business for purposes of the second sentence of section 50(a)(6).

(2)Notwithstanding an election under section 1362, an S corporation shall continue to be liable for any increase in tax under section 49(b) or 50(a) attributable to credits allowed for taxable years for which such corporation was not an S corporation.

(3)Paragraph (1) of subsection (c) shall not apply to any increase in tax under section 49(b) or 50(a) for which the S corporation is liable.

(e)(1)Any distribution of money by a corporation with respect to its stock during a post-termination transition period shall be applied against and reduce the adjusted basis of the stock, to the extent that the amount of the distribution does not exceed the accumulated adjustments account (within the meaning of section 1368(e)).

(2)An S corporation may elect to have paragraph (1) not apply to all distributions made during a post-termination transition period described in section 1377(b)(1)(A). Such election shall not be effective unless all shareholders of the S corporation to whom distributions are made by the S corporation during such post-termination transition period consent to such election.

(f)In the case of a distribution of money by an eligible terminated S corporation (as defined in section 481(d)) after the post-termination transition period, the accumulated adjustments account shall be allocated to such distribution, and the distribution shall be chargeable to accumulated earnings and profits, in the same ratio as the amount of such accumulated adjustments account bears to the amount of such accumulated earnings and profits.

Notes & Related Subsidiaries

Editorial Notes

Prior Provisions

A prior section 1371, added Pub. L. 85–866, title I, § 64(a), Sept. 2, 1958, 72 Stat. 1650; amended Pub. L. 86–376, § 2(a), Sept. 23, 1959, 73 Stat. 699; Pub. L. 88–272, title II, § 233(a), Feb. 26, 1964, 78 Stat. 112; Pub. L. 94–455, title IX, § 902(a)(1), (2), (c)(1), (2), Oct. 4, 1976, 90 Stat. 1608, 1609; Pub. L. 95–600, title III, §§ 341, 342, title VII, § 701(y)(1), Nov. 6, 1978, 92 Stat. 2843, 2921; Pub. L. 96–589, § 5(d), Dec. 24, 1980, 94 Stat. 3406; Pub. L. 97–34, title II, §§ 233(a), 234(a), (b), Aug. 13, 1981, 95 Stat. 250, 251; Pub. L. 97–448, title I, § 102(i)(1), Jan. 12, 1983, 96 Stat. 2372, related to definitions applicable to election of small business corporations as to taxable status, prior to the general revision of this subchapter by section 2 of Pub. L. 97–354.

Amendments

2025—Subsec. (d)(1). Pub. L. 119–21 substituted “section 50(a)(6)” for “section 50(a)(5)”. 2022—Subsec. (d)(1). Pub. L. 117–167 substituted “section 50(a)(5)” for “section 50(a)(4)”. 2017—Subsec. (f). Pub. L. 115–97 added subsec. (f). 1996—Subsec. (a). Pub. L. 104–188 reenacted heading without change and amended text generally. Prior to amendment, text read as follows: “(1) In general.—Except as otherwise provided in this title, and except to the extent inconsistent with this subchapter, subchapter C shall apply to an S corporation and its shareholders. “(2) S corporation as shareholder treated like individual.—For purposes of subchapter C, an S corporation in its capacity as a shareholder of another corporation shall be treated as an individual.” 1990—Subsec. (d)(1). Pub. L. 101–508, § 11813(b)(23)(A), substituted “section 50(a)(4)” for “section 47(b)”. Subsec. (d)(2), (3). Pub. L. 101–508, § 11813(b)(23)(B), substituted “section 49(b) or 50(a)” for “section 47”. 1986—Subsec. (e)(1). Pub. L. 99–514, § 1899A(33), inserted “(within the meaning of section 1368(e))”. Subsec. (e)(2). Pub. L. 99–514, § 1899A(34), struck out “(within the meaning of section 1368(e))” after “to such election”. 1984—Subsec. (c)(1). Pub. L. 98–369, § 621(e)(2), substituted “paragraphs (2) and (3) and subsection (d)(3)” for “paragraphs (2) and (3)”. Subsec. (d)(3). Pub. L. 98–369, § 721(e)(1), added par. (3). Subsec. (e). Pub. L. 98–369, § 721(o), amended subsec. (e) generally, designating existing provisions as par. (1) and adding par. (2). Subsec. (e)(2). Pub. L. 98–369, § 721(x)(3), inserted “(within the meaning of section 1368(e))”.

Statutory Notes and Related Subsidiaries

Effective Date

of 2025 AmendmentAmendment by Pub. L. 119–21 applicable to taxable years beginning after July 4, 2025, see section 70513(g)(1) of Pub. L. 119–21, set out in a note under section 48 of this title.

Effective Date

of 2022 AmendmentAmendment by Pub. L. 117–167 applicable to property placed in service after Dec. 31, 2022, and, for any property the

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of which begins prior to Jan. 1, 2023, only to the extent of the basis thereof attributable to the

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, re

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, or erection after Aug. 9, 2022, see section 107(f) of Pub. L. 117–167, set out as a note under section 905 of Title 2, The Congress.

Effective Date

of 1996 AmendmentAmendment by Pub. L. 104–188 applicable to taxable years beginning after Dec. 31, 1996, see section 1317(a) of Pub. L. 104–188, set out as a note under section 641 of this title.

Effective Date

of 1990 AmendmentAmendment by Pub. L. 101–508 applicable to property placed in service after Dec. 31, 1990, but not applicable to any transition property (as defined in section 49(e) of this title), any property with respect to which qualified progress expenditures were previously taken into account under section 46(d) of this title, and any property described in section 46(b)(2)(C) of this title, as such sections were in effect on Nov. 4, 1990, see section 11813(c) of Pub. L. 101–508, set out as a note under section 45K 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.

Savings Provision

For provisions that nothing in amendment by Pub. L. 101–508 be construed to affect treatment of certain transactions occurring, property acquired, or items of income, loss, deduction, or credit taken into account prior to Nov. 5, 1990, for purposes of determining liability for tax for periods ending after Nov. 5, 1990, see section 11821(b) of Pub. L. 101–508, set out as a note under section 45K of this title. Plan

Amendments

Not Required Until January 1, 1989For provisions directing that if any

Amendments

made by subtitle A or subtitle C of title XI [§§ 1101–1147 and 1171–1177] or title XVIII [§§ 1800–1899A] of Pub. L. 99–514 require an amendment to any plan, such plan amendment shall not be required to be made before the first plan year beginning on or after Jan. 1, 1989, see section 1140 of Pub. L. 99–514, as amended, set out as a note under section 401 of this title.

§1371 Coordination with subchapter C

Summary

Title 26, §1371

Notes & Related Subsidiaries

Editorial Notes

Prior Provisions

Amendments

Statutory Notes and Related Subsidiaries

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