 Helpful Articles
from David Vollrath,
Union County Foundation Executive Director
The Foundation encourages you to work closely with your professional advisor(s)
as you develop your estate plan and consider your present and future charitable goals. |
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The S Corporation and Business Planning
By David Vollrath, Executive Director Union County Foundation
This is the second in a series addressing different business forms and some of the accompanying charitable and
business planning circumstances of each. Last time we discussed the traditional C Corporation. C corporations pay
tax on net income at the corporate level and shareholders also pay tax on income they receive through dividends.
With this structure income is essentially taxed twice. Another common form of organization is the ôSö
corporation. S corporations are similar to C corporations except income is taxed differently. To become an S corporation
an S election must be executed. Not all corporations are eligible to make the S election. To qualify a corporation
must have only one class of stock and no more than 100 stockholders. The stockholders must be individuals, estates,
or certain types of trusts and charities.
The main feature of an S corporation is that it does not pay tax at the corporate level on income. Rather than
at the corporate level the shareholders of the S corporation must include their proportionate share of the corporation's
income, deductions, and credits on their own personal tax returns; this is true even if the corporation's income
isn't actually distributed to the stockholders. This method of taxation is commonly termed ôpass throughö
taxation because the corporation's income etc. is passed through to the individual stockholders.
When a person buys or sells his S corporation stock the gain or loss is determined by the stockholder's cost basis.
With an S corporation there are two kinds of basis. The first kind is called inside basis which is the corporation's
basis in its assets. The second kind is termed outside, which is the individual shareholders cost basis in their
stock. When a shareholder in an S corporation sells his stock the gain or loss is determined by the difference
between the sale price and the outside basis. When the S corporation itself sells stock the gain or loss is determined
by the difference between the sale price and the corporation's inside basis.
In most cases an owner of S corporation stock can gift the stock to a charitable organization and receive a charitable
deduction. The deduction is generally the amount of the cost basis plus any long term capital gain. Generally when
a donor contributes S corporation stock the stock amount represents a minority interest in the corporation. Because
the stock gift is a minority interest, a qualified appraiser will generally apply a discount to the value of the
stock.
A final consideration for the donor when gifting S corporation stock is that there can not be a binding agreement
with the charity for the donor to repurchase the stock. Such an arrangement will negate any bypass of capital gain
and trigger other tax consequences. Repurchase of the stock is permissible but no binding agreement prior to the
gift can be in place.
The Union County Foundation encourages you to work with your professional financial advisors as you consider your
charitable goals and estate planning. Please call our staff at 937-642-9618, email info@unioncountyfoundation.org,
or stop by our Marysville office at 126 N. Main St. We are committed to helping you…. “Invest Today, Shape Tomorrow.” |
