Masonry Magazine August 1997 Page. 25
Making matters worse, if S corporation status is revoked or terminated, the incorporated masonry contractor may not, without IRS consent, reelect S corporation status until the fifth year after the year in which the termination or revocation became effective. Of course, after last summer's law changes, any termination of a S election in a tax year beginning before January 1, 1997, may be disregarded.
S corporations may presently have only 35 shareholders, increased to a maximum of 75 next year (1997). The restrictions on who may or may not be a shareholder in an S corporation have been relaxed somewhat. Partnerships, nonresident aliens and some tax-exempt organizations are not permitted to be S corporation shareholders. S corporations are also presently prohibited from issuing preferred stock, which prevents them from seeking certain types of non-commercial capital financing.
As signed into law, the bill permits S corporations to own 100 percent of an S corporation subsidiary. The parent and the subsidiary would be treated as a single S corporation. In addition, the rule changes repeal the prohibition on S corporation membership in an affiliated group by allowing S corporations to own up to 100 percent of a regular, 'C' corporation's stock. Scorporations cannot, of course, file tax returns as part of an affiliated group of companies.
The legislation also allows S corporation ownership by as many as 75 shareholders. More types of shareholders, such as employee stock ownership plans (ESOPs), pension plans, charities and even some financial institutions will be eligible. This should substantially increase the financing options available to every masonry contractor operating as an S corporation.
A corporation, by everyone's definition, is a legal entity, separate and distinct from the persons who own it. It is regarded under our laws as an artificial person, able to own property, incur debts, sue or be sued. Its main features include limited liability (generally, owners can lose only what they invest), easy transfer of ownership through the sale of shares of stock and a continuity of existence.
The S corporate status permits every contractor to benefit from the advantages of an incorporated masonry business while, at the same time, receive treatment for tax purposes as if that business entity was a partnership. All deductions and losses are passed along to the shareholder or shareholders to reduce their tax bills. And it will get even better as the new laws begin to take effect.
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MASONRY-JULY/AUGUST, 1997 25