Back to Corporations And Other Business Entities

Corporations and Other Business Entities

  • 798. How is a corporation taxed?

    • Any corporation, including a professional corporation or association, is considered a C corporation, taxable under the following rules, unless an election is made to be treated as an S corporation.

      Graduated Tax Rates

      Under the 2017 Tax Act, all corporations pay a flat income tax of 21 percent for tax years beginning after 2017 (these rates are not set to expire). There is no special rate for personal service corporations. Prior to 2018, a corporation paid tax according to a graduated rate schedule where the rates ranged from 15 percent to 35 percent.1  A “personal service corporation” was subject to a different income tax rate prior to 2018. See Q 812.


      Planning Point: The reduced corporate tax rate may encourage many business owners to explore converting from a pass-through entity (taxed at the individual’s ordinary income tax rate) to a C corporation, but caution should be exercised in making this decision. This move could potentially be beneficial for businesses that retain a significant portion of their earnings each year (whether to grow the business through asset acquisitions or simply for investment purposes). Those earnings would be taxed at the 21 percent corporate income tax rate rather than (potentially) the highest 37 percent individual tax rate that applies to pass-through income.

      Despite this, when those funds are eventually distributed to shareholders, they will again be taxed as dividends (to which a maximum 23.8 percent tax may apply when considering the 3.8 percent investment income tax). The total effective tax rate works out to approximately 39.8 percent (higher than the maximum individual income tax rate). This second tax, however, can be deferred until a future date, allowing the corporation to use the funds in the meantime. In using this strategy, the accumulated earnings tax and personal holding company tax (both taxes designed to discourage corporations from retaining excess earnings beyond the reasonable needs of the business) must be considered.

      Corporations may also wish to consider reducing the “compensation” paid to owner-employees, as those payments (while deductible by the corporation) can be taxed at up to 37 percent (plus employment taxes) after the 21 percent corporate rate has been imposed. Dividends, while not deductible by the corporation, would only be subject to a 23.8 percent second tax upon distribution.

      S corporations that convert to C corporations and find that the move was ill-advised must also be aware that there is a five-year waiting period before it can convert back to S corporation status.


      Taxable income is computed for a corporation in much the same way as for an individual. Generally, a corporation may take the same deductions as an individual, except those of a personal nature (e.g., deductions for medical expenses). A corporation also does not receive a standard deduction.

      There are a few special deductions for corporations, however including a “dividends received deduction”. The 2017 Tax Act reduced the 80 percent dividends received deduction to 65 percent (for corporations that own at least 20 percent of the stock of another corporation) and reduced the otherwise applicable 70 percent dividends received deduction to 50 percent.2 Prior to 2018, the deduction was equal to 70 percent of dividends received from other domestic corporations, 80 percent of dividends received from a 20 percent owned company, and 100 percent for dividends received from affiliated corporations.3 For tax years ending after 2019 a corporation may deduct contributions to charitable organizations to the extent of 25 percent of taxable income (with certain adjustments).4 Generally, charitable contributions in excess of the percentage limit may be carried over for five years.5

      Prior to 2018, a corporation was also allowed a deduction for production activities. Prior to its repeal by the 2017 Tax Act, this deduction was fully phased in (in 2010), and was equal to nine percent of a taxpayer’s qualified production activities income (or, if less, the taxpayer’s taxable income). The deduction was limited to 50 percent of the W-2 wages paid by the taxpayer for the year. The definition of “production activities” was broad and included construction activities, energy production, and the creation of computer software.6


      1.     IRC § 11(b).

      2.     IRC §§ 243(a)(1), 243(c)(1).

      3.     IRC § 243.

      4.     IRC § 170(b)(2); CARE Act § 2205(a)(2)B).

      5.     IRC § 170(d)(2).

      6.     IRC § 199, prior to repeal by Pub. Law No. 115-97 (the 2017 Tax Act).

  • 799. How is a corporation taxed on capital gains?

    • Capital gains and losses are netted in the same manner as for an individual and net short-term capital gain, to the extent it exceeds net long-term capital loss, if any, is taxed at the corporation’s regular tax rates. Prior to 2018, a corporation reporting a “net capital gain” (i.e., where net long-term capital gain exceeds net short-term capital loss) was taxed under one of two following methods, depending on which produces the lower tax (the “alternative method” was repealed by the 2017 Tax Act):

      1. Regular method. Net capital gain is included in gross income and taxed at the corporation’s regular tax rates; or
      2. Alternative method (prior to repeal). First, a tax on the corporation’s taxable income, exclusive of “net capital gain,” was calculated at the corporation’s regular tax rates. Then a second tax on the “net capital gain” (or, if less, taxable income) for the year is calculated at the rate of 35 percent. The tax on income exclusive of net capital gain and the tax on net capital gain are added to arrive at the corporation’s total tax. For certain gains from timber, the maximum rate is 15 percent.1

      1.     IRC §§ 1201, prior to repeal by Pub. Law No. 115-97 (the 2017 Tax Act), 1222.

  • 800. How was a corporation’s alternative minimum tax calculated prior to repeal by the 2017 tax reform?

    • Editor’s Note: The 2017 tax reform legislation repealed the corporate alternative minimum tax (AMT) for tax years beginning in 2018 and thereafter. The 2020 CARES Act further modified the rules governing use of existing AMT credits (see heading below).

      Editor’s Note: The Inflation Reduction Act of 2022 adds a new 15 percent corporate alternative minimum tax to ensure that corporations with at least $1 billion in profits would be subject to a minimum 15 percent income tax rate. The tax applies to any corporation with an average annual adjusted financial statement income that exceeds $1 billion over any consecutive three-year period preceding the current tax year. The 15 percent rate is applied to the company’s “book income,” rather than adjusted gross income as reported to the IRS, in an effort to prevent corporations from using deductions and credits to escape taxation. The law requires corporations with at least $1 billion in earnings to determine their tax liability in two ways. First, the corporation calculates taxes using the existing 21 percent rate structure, using currently available deductions and credits. Second, they calculate tax liability by applying the 15 percent rate to their book income as reported to shareholders and investors on financial statements. The corporation then owes whichever figure is higher.

      Prior to 2018, a corporate taxpayer was required to calculate its liability under the regular tax and a tentative minimum tax, then add to its regular tax so much of the tentative minimum tax as exceeds its regular tax. The amount added was the alternative minimum tax.1

      To calculate its alternative minimum tax (AMT), a corporation first calculated its “alternative minimum taxable income” (AMTI).2 Also, the corporation calculated its “adjusted current earnings” (ACE), increasing its AMTI by 75 percent of the amount by which ACE exceeded AMTI (or possibly reducing its AMTI by 75 percent of the amount by which AMTI exceeded ACE).3 The tax itself was a flat 20 percent of AMTI.4 Each corporation received a $40,000 exemption; however, the exemption amount was reduced by 25 percent of the amount by which AMTI exceeded $150,000 (thus phasing out completely at $310,000).5

      AMTI is regular taxable income determined with certain adjustments and increased by tax preferences.6 Tax preferences for corporate taxpayers are the same as for other taxpayers. Adjustments to income included the following: (1) property was generally depreciated under a less accelerated or a straight line method over a longer period, except that a longer period was not required for property placed in service after 1998; (2) mining exploration and development costs were amortized over 10 years; (3) a percentage of completion method was required for long-term contracts; (4) net operating loss deductions were generally limited to 90 percent of AMTI (although some relief was available in 2001 and 2002); (5) certified pollution control facilities were depreciated under the alternative depreciation system except those that were placed in service after 1998, which would use the straight line method; and (6) the adjustment based on the corporation’s adjusted current earnings (ACE).7

      To calculate ACE, a corporation began with AMTI (determined without regard to ACE or the AMT net operating loss) and made additional adjustments. These adjustments included adding certain amounts of income that were includable in earnings and profits but not in AMTI (including income on life insurance policies and receipt of key person insurance death proceeds). The amount of any such income added to AMTI was reduced by any deductions that would have been allowed in calculating AMTI had the item been included in gross income. The corporation was generally not allowed a deduction for ACE purposes if that deduction would not have been allowed for earnings and profits purposes. However, certain dividends received by a corporation were allowed to be deducted. Generally, for property placed into service after 1989 but before 1994, the corporation was required to recalculate depreciation according to specified methods for ACE purposes. For ACE purposes, earnings and profits were adjusted further for certain purposes such as the treatment of intangible drilling costs, amortization of certain expenses, installment sales, and depletion.8

      Application of the adjustments for ACE with respect to life insurance is explained at Q 316.

      A corporation subject to the AMT in one year could have been allowed a minimum tax credit against regular tax liability in subsequent years. The credit was equal to the excess of the adjusted net minimum taxes imposed in prior years over the amount of minimum tax credits allowable in prior years.9 However, the amount of the credit could not be greater than the excess of the corporation’s regular tax liability (reduced by certain credits such as certain business related credits and certain investment credits) over its tentative minimum tax.10

      Because the 2017 Tax Act eliminated the corporate AMT, corporate taxpayers with existing AMT credit from a prior year may offset regular tax liability with the credit for any taxable year. Existing AMT credits will be refundable for tax years after 2017 and before 2022 in an amount equal to 50 percent (100 percent before 2021) of the excess of the minimum tax credit for the taxable year over the amount of the credit allowable for the year against regular tax liability (this basically means that the full amount of the credit will be available before 2022).11 But see CARES Act below.

      CARES Act

      As noted above, the 2017 tax reform legislation generally repealed the corporate AMT, but also permitted corporations to continue claiming a minimum credit for prior year AMT paid. The credit can generally be carried forward to offset corporate tax liability in a later year. The CARES Act eliminates certain limitations that applied to the carryover provision, so that corporations could claim refunds for their unused AMT credits for the first tax year that began in 2018 (i.e., the corporation was required to take the entire amount of the refundable credit for 2018).12 The corporation must submit the application for refund before December 31, 2020.

      The IRS implemented a temporary procedure that allowed taxpayers to fax Form 1139 and Form 1045 to get faster refunds related to prior year AMT credits and NOL deductions. The fax procedures appled only to elections under CARES Act Section 2303 (NOLs) and Section 2305 (AMT credit). Forms were faxed to 844-239-6236 (Form 1139) or 844-239-6236 (Form 1045). The same forms could be used for both claims, and the IRS advised that the form instructions could be disregarded pending release of revised instructions.13


      1.     IRC §§ 55-59.

      2.     IRC § 55(b)(2).

      3.     IRC § 56(g).

      4.     IRC § 55(b)(1)(B).

      5.     IRC §§ 55(d)(2), 55(d)(3).

      6.     IRC § 55(b)(2).

      7.     IRC §§ 56(a), 56(c), 56(d).

      8.     IRC. § 56(g).

      9.     IRC § 53(b).

      10.   IRC § 53(c).

      11.   IRC § 53(e).

      12.   IRC § 53(e).

      13.   See IRS FAQ : https://www.irs.gov/newsroom/temporary-procedures-to-fax-certain-forms-1139-and-1045-due-to-covid-19

  • 801. How was the alternative minimum tax calculated for certain small corporations prior to repeal by the 2017 tax reform legislation?

    • Editor’s Note: The 2017 tax reform leglsiation repealed the corporate alternative minimum tax (AMT) for tax years beginning in 2018 and thereafter.

      Prior to 2018, certain small corporations were deemed to have a tentative minimum tax of zero and thus were exempt from the AMT. To qualify for the exemption, the corporation was required to meet a gross receipts test for the three previous taxable years. To meet the test, a corporation’s average annual gross receipts for the three years could not exceed $7.5 million. For purposes of the gross receipts test, only tax years beginning after 1993 were taken into account. For a corporation not in existence for three full years, those years the corporation was in existence were substituted for the three years (with annualization of any short taxable year). To initially qualify for the exemption, the corporation was required to meet the three-year gross receipts test but with $5 million substituted for $7.5 million. Generally, a corporation was exempt from the AMT in its first year of existence.1

      If a corporation failed to maintain its small corporation status, it lost the exemption from the AMT. If that happened, certain adjustments used to determine the corporation’s AMTI were applied for only those transactions entered into or property placed in service in tax years beginning with the tax year in which the corporation ceased to be a small corporation and tax years thereafter.2 A corporation exempt from the AMT because of the small corporation exemption may have been limited in the amount of credit it could take for AMT paid in previous years. In computing the AMT credit, the corporation’s regular tax liability (reduced by applicable credits) used to calculate the credit was reduced by 25 percent of the amount that such liability exceeded $25,000.3


      1.     IRC §§ 55(e), prior to repeal by TCJA 2017, 448(c)(3).

      2.     IRC § 55(e)(2), prior to repeal by TCJA 2017.

      3.     IRC § 55(e)(5), prior to repeal by TCJA 2017.

  • 802. What is the accumulated earnings tax?

    • Editor’s Note: The 2017 Tax Act limited the members of a controlled group of corporations (the members of which are determined as of December 31 of the relevant year) to a single $250,000 amount in order to compute the accumulated earnings credit ($150,000 if any member of the group is a service organization in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts or consulting).1 This amount must be divided equally among the members of the controlled group unless future regulations provide that unequal allocations are permissible.2

      A corporation is subject to a penalty tax, in addition to the otherwise applicable corporate income tax, if, for the purpose of preventing the imposition of income tax upon its shareholders, it accumulates earnings instead of distributing them.3 The tax is 20 percent of the corporation’s accumulated taxable income (15 percent for tax years beginning prior to 2013).4 Accumulated taxable income is taxable income for the year (after certain adjustments) less the federal income tax, dividends paid to stockholders (during the taxable year or within 2½ months after the close of the taxable year), and the “accumulated earnings credit.”5


      Planning Point: IRS officials have noted that additional guidance may be needed on the application of the accumulated earnings tax in the wake of tax reform. The 2017 tax reform legislation lowered the corporate tax rate from 35 percent to 21 percent, potentially providing motivation for some companies to convert to C corporation status rather than attempt to interpret the complicated pass-through provisions that apply post-reform. However, the legislation did not modify the accumulated earnings tax, which applies a 20 percent penalty tax to undistributed corporate earnings and profits in excess of the reasonable business needs of the company. This “reasonableness” standard can be difficult to interpret and could require additional guidance in the coming years, as more businesses may attempt to take advantage of lower corporate rates by simply distributing fewer dividends to business owners.


      The tax can be imposed only upon amounts accumulated beyond those required to meet the reasonable needs of the business since an accumulated earnings credit, generally equal to this amount, is allowed. A corporation must demonstrate a specific, definite and feasible plan for the use of the accumulated funds in order to avoid the tax.6 The use of accumulated funds for the personal use of a shareholder and his family is evidence that the accumulation was to prevent the imposition of income tax upon its shareholders.7 In deciding whether a family owned bank was subject to the accumulated earnings tax, the IRS took into account the regulatory scheme the bank was operating under to determine its reasonable needs.8 Most corporations are allowed a minimum accumulated earnings credit equal to the amount by which $250,000 ($150,000 in the case of service corporations in health, law, engineering, architecture, accounting, actuarial science, performing arts or consulting) exceeds the accumulated earnings and profits of the corporation at the close of the preceding taxable year.9 Consequently, an aggregate of $250,000 ($150,000 in the case of the above listed service corporations) may be accumulated for any purpose without danger of incurring the penalty tax.

      Tax-exempt income is not included in the accumulated taxable income of the corporation but will be included in earnings and profits in determining whether there has been an accumulation beyond the reasonable needs of the business.10 However, a distribution in redemption of stock to pay death taxes which is treated as a dividend does not qualify for the “dividends paid” deduction in computing accumulated taxable income (see Q 300, Q 303).11

      The accumulated earnings tax applies to all C corporations, without regard to the number of shareholders in taxable years beginning after July 18, 1984.12


      1.     Under IRC § 535(c).

      2.     IRC § 1561(a).

      3.     IRC §§ 531-537; GPD, Inc. v. Comm., 508 F. 2d 1076, 75-1 USTC ¶9142 (6th Cir. 1974).

      4.     IRC § 531, as amended by ATRA.

      5.     IRC § 535.

      6.     Eyefull Inc. v. Comm., TC Memo 1996-238.

      7.     Northwestern Ind. Tel. Co. v. Comm., 127 F. 3d 643, 97-2 USTC ¶50,859 (7th Cir. 1997).

      8.     TAM 9822009.

      9.     IRC § 535(c)(2).

      10.   Rev. Rul. 70-497, 1970-2 CB 128.

      11.   Rev. Rul. 70-642, 1970-2 CB 131.

      12.   IRC § 532(c).

  • 803. What is the personal holding company tax?

    • The personal holding company (PHC) tax is a penalty tax designed to keep shareholders from avoiding personal income taxes on securities and other income-producing property placed in a corporation to avoid higher personal income tax rates. The PHC tax is 20 percent (15 percent for tax years beginning prior to 2013) of the corporation’s undistributed PHC income (taxable income adjusted to reflect its net economic income for the year, minus dividends distributed to shareholders), if it meets both the “stock ownership” and “PHC income” tests.1

      A corporation meets the “stock ownership” test if more than 50 percent of the value of its stock is owned, directly or indirectly, by or for not more than 5 shareholders.2 Certain stock owned by families, trusts, estates, partners, partnerships, and corporations may be attributed to individuals for purposes of this rule.3

      A corporation meets the “PHC income” requirement if 60 percent or more of its adjusted ordinary gross income is PHC income, generally defined to include the following: (1) dividends, interest, royalties, and annuities; (2) rents; (3) mineral, oil, and gas royalties; (4) copyright royalties; (5) produced film rents (amounts derived from film properties acquired before substantial completion of the production); (6) compensation from use of corporate property by shareholders; (7) personal service contracts; and (8) income from estates and trusts.4


      1.     IRC §§ 541, as amended by ATRA, 542, 545.

      2.     IRC § 542(a)(2).

      3.     IRC § 544.

      4.     IRC §§ 542(a)(1), 543(a).

  • 804. How are corporations that are classified as professional corporations and associations taxed?

    • Organizations of physicians, lawyers, and other professional people organized under state professional corporation or association acts are generally treated as corporations for tax purposes.1 However, to be treated as a corporation, a professional service organization must be both organized and operated as a corporation.2 Although professional corporations are generally treated as corporations for tax purposes, they are not generally taxed the same as regular C corporations. See Q 812.Note that if a professional corporation has elected S corporation status, the shareholders will be treated as S corporation shareholders.

      Although a professional corporation is recognized as a taxable entity separate and apart from the professional individual or individuals who form it, the IRS may under some circumstances reallocate income, deductions, credits, exclusions, or other allowances between the corporation and its owners in order to prevent evasion or avoidance of tax or to properly reflect the income of the parties. Under IRC Section 482, such reallocation may be made only where the individual owner operates a second business distinct from the business of the professional corporation; reallocation may not be made where the individual works exclusively for the professional corporation.3 However, note that the IRS has stated that it will not follow the Foglesong decision to the extent that it held that the two business requirement of IRC Section 482 is not satisfied where a controlling shareholder works exclusively for the controlled corporation.4 A professional corporation may also be subject to the special rules applicable to “personal service corporations,” see Q 812.


      1.     Rev. Rul. 77-31, 1977-1 CB 409.

      2.     Roubik v. Comm., 53 TC 365 (1969).

      3.     Foglesong v. Comm., 691 F. 2d 848, 82-2 USTC ¶9650 (7th Cir. 1982).

      4.     Rev. Rul. 88-38, 1988-1 CB 246.

  • 805. What is an S corporation? How is an S corporation taxed?

    • Editor’s Note: See Q 806 and Q 807 for a discussion of the changes to pass-through taxation that were implemented under the 2017 tax reform legislation.

      An S corporation is one that elects to be treated, in general, as a pass-through entity, thus avoiding most tax at the corporate level.1 To be eligible to make the election, a corporation must meet certain requirements as to the kind and number of shareholders, classes of stock, and sources of income. An S corporation must be a domestic corporation with only a single class of stock and may have up to 100 shareholders (none of whom are nonresident aliens) who are individuals, estates, and certain trusts. An S corporation may not be an ineligible corporation. An ineligible corporation is one of the following: (1) a financial institution that uses the reserve method of accounting for bad debts; (2) an insurance company; (3) a corporation electing (under IRC Section 936) credits for certain tax attributable to income from Puerto Rico and other U.S. possessions; or (4) a current or former domestic international sales corporation (DISC). Qualified plans and certain charitable organizations may be S corporation shareholders.2

      Members of a family are treated as one shareholder. “Members of the family” are defined as “the common ancestor, lineal descendants of the common ancestor, and the spouses (or former spouses) of such lineal descendants or common ancestor.” Generally, the common ancestor may not be more than six generations removed from the youngest generation of shareholders who would be considered members of the family.3

      Trusts that may be S corporation shareholders include the following: (1) a trust all of which is treated as owned by an individual who is a citizen or resident of the United States under the grantor trust rules (see Q 797); (2) a trust that was described in (1) above immediately prior to the deemed owner’s death and continues in existence after such death may continue to be an S corporation shareholder for up to two years after the owner’s death; (3) a trust to which stock is transferred pursuant to a will may be an S corporation shareholder for up to two years after the date of the stock transfer; (4) a trust created primarily to exercise the voting power of stock transferred to it; (5) a qualified subchapter S trust (QSST); (6) an electing small business trust (ESBT); and (7) in the case of an S corporation that is a bank, an IRA or Roth IRA.4

      A QSST is a trust that has only one current income beneficiary (who must be a citizen or resident of the U.S.), all income must be distributed currently, and corpus may not be distributed to anyone else during the life of such beneficiary. The income interest must terminate upon the earlier of the beneficiary’s death or termination of the trust, and if the trust terminates during the lifetime of the income beneficiary, all trust assets must be distributed to that beneficiary. The beneficiary must make an election for the trust to be treated as a QSST.5

      An ESBT is a trust in which all of the beneficiaries are individuals, estates, or charitable organizations.6 Each potential current beneficiary of an ESBT is treated as a shareholder for purposes of the shareholder limitation.7 A potential current beneficiary is generally, with respect to any period, someone who is entitled to, or in the discretion of any person may receive, a distribution of principal or interest of the trust. In addition, a person treated as an owner of a trust under the grantor trust rules (see Q 797) is a potential current beneficiary.8 If for any period there is no potential current beneficiary of an ESBT, the ESBT itself is treated as an S corporation shareholder.9 Trusts exempt from income tax, QSSTs, charitable remainder annuity trusts, and charitable remainder unitrusts may not be ESBTs. An interest in an ESBT may not be obtained by purchase.10 If any portion of a beneficiary’s basis in the beneficiary’s interest is determined under the cost basis rules, the interest was acquired by purchase.11 An ESBT is taxed at the highest income tax rate under IRC Section 1(e) (currently, 37 percent).12 The 2017 Tax Act expands the definition of a qualifying beneficiary under an electing small business trust (ESBT) to include nonresident aliens.13 This provision is effective beginning January 1, 2018.

      A corporation will be treated as having one class of stock if all of its outstanding shares confer identical rights to distribution and liquidation proceeds.14 However, “bona fide agreements to redeem or purchase stock at the time of death, disability or termination of employment” will be disregarded for purposes of the one-class rule unless a principal purpose of the arrangement is to circumvent the one-class rule. Similarly, bona fide buy-sell agreements will be disregarded unless a principal purpose of the arrangement is to circumvent the one-class rule and they establish a purchase price that is not substantially above or below the fair market value of the stock. Agreements that provide for a purchase price or redemption of stock at book value or a price between book value and fair market value will not be considered to establish a price that is substantially above or below fair market value.15 Regulations provide that agreements triggered by divorce and forfeiture provisions that cause a share of stock to be substantially nonvested will be disregarded in determining whether a corporation’s shares confer identical rights to distribution and liquidation proceeds.16

      An S corporation is generally not subject to tax at the corporate level.17 However, a tax is imposed at the corporate level under certain circumstances described in Q 809. When an S corporation disposes of property within 10 years after an election has been made, gain attributable to pre-election appreciation of the property (built in gain) is taxed at the corporate level to the extent such gain does not exceed the amount of taxable income imposed on the corporation if it were not an S corporation.18 ARRA 2009 provided that, in the case of a taxable year beginning in 2011, no tax is imposed on the built in gain if the fifth taxable year of the 10-year recognition period precedes such taxable year.

      Like a partnership, an S corporation computes its taxable income similarly to an individual, except that certain personal and other deductions (see Q 806 for a discussion of the new QBI deduction) are allowed to a shareholder but not to the S corporation, and the corporation may elect to amortize organizational expenses.19 Each shareholder then reports on his individual return his proportionate share of the corporation’s items of income, loss, deductions and credits. These items retain their character on pass-through.20 Certain items of income, loss, deduction or credit must be passed through as separate items because they may have an effect on each individual shareholder’s tax liability. For example, net capital gains and losses pass through as such to be included with the shareholder’s own net capital gain or loss. Any gains and losses on certain property used in a trade or business are passed through separately to be aggregated with the shareholder’s other IRC Section 1231 gains and losses. (Gains passed through are reduced by any tax at the corporate level on gains.)

      Miscellaneous itemized deductions pass through to be combined with the individual’s miscellaneous deductions for purposes of the 2 percent floor on such deductions (these deductions were suspended from 2018-2025). Charitable contributions pass through to shareholders separately subject to the individual shareholder’s percentage limitations on deductibility. Tax-exempt income passes through as such. Items involving determination of credits pass through separately.21 Before pass-through, each item of passive investment income is reduced by its proportionate share of the tax at the corporate level on excess net passive investment income.22 Items that do not need to be passed through separately are aggregated on the corporation’s tax return and each shareholder reports his share of such non-separately computed net income or loss on his individual return.23 Items of income, deductions, and credits (whether or not separately stated) that flow through to the shareholder are subject to the “passive loss” rule (see Q 8009 through Q 8020) if the activity is passive with respect to the shareholder (see Q 8010). Apparently, items taxed at the corporate level are not subject to the passive loss rule unless the corporation is either closely held or a personal service corporation (see Q 8009). See Q 736 and Q 737 for a discussion of how the deduction for business interest was impacted by the 2017 Tax Act.

      Thus, whether amounts are distributed to them or not, shareholders are taxed on the corporation’s taxable income. Shareholders take into account their shares of income, loss, deduction and credit on a per-share, per-day basis.24 The S corporation income must also be included on a current basis by shareholders for purposes of the estimated tax provisions (see Q 648).25

      The Tax Court determined that when an S corporation shareholder files for bankruptcy, all the gains and losses for that year flowed through to the bankruptcy estate. The gains and losses should not be divided based on the time before the bankruptcy was filed.26


      1.     See IRC §§ 1361, 1362, 1363.

      2.     IRC § 1361.

      3.     IRC § 1361(c)(1).

      4.     IRC §§ 1361(c)(2), 1361(d).

      5.     IRC § 1361(d).

      6.     IRC § 1361(e).

      7.     IRC § 1361(c)(2)(B)(v).

      8.     Treas. Reg. § 1.1361-1(m)(4).

      9.     Treas. Reg. § 1.1361-1(h)(3)(i)(F).

      10.   IRC § 1361(e).

      11.   Treas. Reg. § 1.1361-1(m)(1)(iii).

      12.   IRC § 641(c).

      13.   IRC §§ 1361(c)(2)(B)(v), 1361(b)(1)(C).

      14.   Treas. Reg. § 1.1361-1(l)(1).

      15.   Treas. Reg. § 1.1361-1(l)(2)(iii). See IRC §§ 1361, 1362.

      16.   Treas. Reg. § 1.1361-1(l)(2)(iii)(B).

      17.   IRC § 1363(a).

      18.   IRC § 1374.

      19.   IRC § 1363(b).

      20.   IRC §§ 1366(a), 1366(b).

      21.   IRC § 1366(a)(1).

      22.   IRC § 1366(f)(3).

      23.   IRC § 1366(a).

      24.   IRC § 1377(a).

      25.   Let. Rul. 8542034.

      26.   Williams v. Comm., 123 TC 144 (2004).

  • 806. How are S corporations taxed under the 2017 tax reform legislation?

    • The 2017 Tax Act made substantial changes to the treatment of pass-through business income, which was previously simply “passed through” and taxed at the business owners’ individual ordinary income tax rates as discussed in Q 805. Partnerships (and entities that elect partnership taxation, such as certain LLCs), S corporations and sole proprietorships are subject to the post-reform pass-through taxation rules, which apply for tax years beginning after December 31, 2017 and before December 31, 2025.1 The rules are complicated, and the IRS and related agencies have released extensive interpretive materials explaining how the provisions will be applied.

      Shareholders of S corporations may now generally deduct 20 percent of “qualified business income”2 (which largely excludes “specified service business” income (see below)).

      S corporations that are categorized as service businesses and have income below the applicable threshold level plus $50,000 ($100,000 for joint returns) also qualify for the 20 percent deduction. The applicable threshold levels for 2024 increase to $383,900 for married taxpayers filing jointly ($364,200 in 2023, $329,800 in 2021, $326,000 in 2020) or $191,950 for single filers ($182,000 in 2023, $164,900 in 2021, $163,300 in 2020). In other words, service business owners with income that exceeds $483,900 (married filing jointly) or $241,950 (single filers) will not receive the benefit of the deduction.3 The entirety of the taxpayer’s income must be taken into account (not only the business’ income).4

      The deduction is available regardless of whether the S corporation shareholder itemizes, and is applied based on ownership interest (i.e., a shareholder who owns 25 percent of an S corporation is entitled to apply the deduction to 25 percent of his or her qualified business income). The calculation is made on an entity-specific basis, meaning that the deduction must be applied separately to each entity rather than based upon the cumulative income of all entities owned by the taxpayer.

      Qualified business income is generally the net amount of qualified items of income, gain, deduction and loss with respect to qualified trades or businesses of the taxpayer, excluding qualified REIT dividends, qualified cooperative dividends and qualified publicly traded partnership income (but see Q 807).5 Income, gain, deduction and loss items are generally qualified if they are connected with a U.S. trade or business and are included or allowed in calculating taxable income. Amounts related to the following investment items are excluded: capital gains, qualified dividend income (or equivalent), non-business interest income, foreign base company income taken into account under IRC Section 954(c) and non-business annuity distributions.6

      For alternative minimum tax purposes, qualified business income is calculated without regard to otherwise allowable adjustments.7

      When the taxpayer’s income exceeds the applicable annual threshold, the deduction is capped at the greater of (1) 50 percent of W-2 wage income or (2) the sum of 25 percent of the W-2 wages of the business plus 2.5 percent of the unadjusted basis, immediately after acquisition, of all “qualified property” (but see Q 807 for a discussion of the so-called “phase-in” for certain taxpayers whose income only exceeds the threshold by $50,000 ($100,000 for joint returns)).8

      “Qualified property” generally includes depreciable property that is used in the taxpayer’s trade or business for the production of income as of the end of the tax year, as long as the depreciation period has not expired before the end of that year. The depreciation period is a period that begins on the first day that the taxpayer places the property in service and ends the later of (1) 10 years after that date or (2) the last day of the last full year in the applicable recovery period that would apply to the property under IRC Section 168 (without regard to Section 168(g)).9

      A “specified service business” is a trade or business involving the performance of services in the fields of health, law, consulting, athletics, financial services, brokerage services or any trade or business where the principal asset of the business is the reputation or skill of one or more employees or workers, or one which involves the performance of services consisting of investing and investment management trading or dealing in securities, partnership interests or commodities.

      To determine the “qualified business income” with respect to a specified service trade or business, the taxpayer takes into account only the applicable percentage of qualified items of income, gain, deduction, or loss, and of allocable W-2 wages.10 With respect to S corporations, qualified business income does not include any amounts that are treated as reasonable compensation of the taxpayer. Similarly, qualified business income does not include guaranteed payments or amounts paid or incurred by a partnership to a partner, when the partner is providing services and is not acting in his or her capacity as a partner.11

      If the qualified business income for the year is a loss, it is carried forward as a loss for the next tax year. Any deduction allowed for that subsequent tax year is reduced by 20 percent of any carried forward business loss from the previous year.12

      The deduction is allowed in reducing taxable income (functioning more like an exclusion), rather than as a deduction in computing adjusted gross income (i.e., the deduction does not impact limitations based on adjusted gross income). Further, trusts and estates are also eligible for the 20 percent deduction.

      For partnerships and S corporations, these rules apply at the partner or shareholder level (each shareholder is treated as having W-2 wages for the year equal to that shareholder’s allocable share of the S corporation).

      See Q 807 for a detailed discussion of how a pass-through entity’s deduction for qualified business income is determined.


      1.     Under IRC § 199A.

      2.     IRC § 199A(a).

      3.     Rev. Proc. 2019-44, Rev. Proc. 2020-45, Rev. Proc. 2021-45, Rev. Proc. 2022-38, Rev. Proc. 2023-34.

      4.     IRC §§ 199A(b)(3), 199A(d)(2).

      5.     IRC § 199A(c).

      6.     IRC §§ 199A(c)(3), 199A(d)(3).

      7.     IRC § 199A(f)(2).

      8.     IRC § 199A(b)(2). IRC § 199A(b)(5) directs the Secretary of Treasury to develop guidance on how these limitations apply in short tax years, or in the case of acquisitions or dispositions of other businesses.

      9.     IRC § 199A(b)(6). IRC Section 168 provides accelerated cost recovery system rules. IRC Section 168(g) provides an alternate depreciation system that may be used with respect to certain property, including tangible property used predominantly outside the U.S., tax-exempt use property and tax-exempt bond financed property.

      10.   As defined in IRC § 199A(b)(4).

      11.   IRC § 199A(c)(4).

      12.   IRC § 199A(c)(2).

  • 807. How is an S corporation’s deduction for qualified business income determined?

    • Entities that are taxed under the rules governing pass-through taxation are generally entitled to a 20 percent deduction for qualified business income (QBI, see Q 806). This deduction is equal to the sum of:

      (a)     the lesser of the combined qualified business income amount for the tax year or an amount equal to 20 percent of the excess of the taxpayer’s taxable income over any net capital gain and cooperative dividends, plus

      (b)     the lesser of 20 percent of qualified cooperative dividends or taxable income (reduced by net capital gain).1

      The sum discussed above may not exceed the taxpayer’s taxable income for the tax year (reduced by net capital gain). Further, the 20 percent deduction with respect to qualified cooperative dividends is limited to taxable income (reduced by net capital gain).

      The deductible amount for each qualified trade or business is the lesser of:

      (a)     20 percent of the qualified business income with respect to the trade or business or

      (b)     the greater of (x) 50 percent of W-2 wage income or (y) the sum of 25 percent of the W-2 wages of the business plus 2.5 percent of the unadjusted basis, immediately after acquisition, of all qualified property (see Q 806).2


      Planning Point: The regulations provide guidance on how UBIA should be calculated in the case of a like-kind exchange or involuntary conversion. The regulations follow the Section 168 regulations in providing that property acquired in a like-kind exchange, or by conversion, is treated as MACRS property, so that the depreciation period is determined using the date the relinquished property was first placed into service unless an exception applies. The exception applies if the taxpayer elected not to apply Treasury Regulation §1.168(i)-6. As a result, most property acquired in a like-kind exchange or involuntary conversion under the new rules will have two relevant placed in service dates. For calculating UBIA, the relevant date is the date the taxpayer places the property into service. For calculating its depreciable period, the relevant date is the date the taxpayer placed the original, relinquished property into service.


      Concurrently with the regulations, the IRS released Notice 2018-64, which contains a proposed revenue procedure with guidance for calculating W-2 wages for purposes of the Section 199A deduction for qualified business income. This guidance was finalized in Revenue Procedure 2019-11. The guidance provides three methods for calculating W-2 wages, including the “unmodified box method”, the “modified Box 1 method”, and the “tracking wages method”. The guidance further specifies that wages calculated under these methods are only taken into account in determining the W-2 wage limitations if properly allocable to QBI under Proposed Treasury Regulation § 1.199A-2(g).

      The unmodified box method involves taking the lesser of (1) the total of Box 1 entries for all W-2 forms or (2) the total of Box 5 entries for all W-2 forms (in either case, those that were filed with the SSA by the taxpayer for the year). Under the modified Box 1 method, the taxpayer subtracts from its total Box 1 entries amounts that are not wages for federal income tax withholding purposes, and then adds back the total of Box 12 entries for certain employees. The tracking wages method requires the taxpayer to actually track employees’ wages, and (1) total the wages subject to income tax withholding and (2) subtract the total of all Box 12 entries of certain employees.

      Revenue Procedure 2019-11 clarifies that, in the case of short taxable years, the business owner is required to use the “tracking wages method” with certain modifications. The total amount of wages subject to income tax withholding and reported on Form W-2 can only include amounts that are actually or constructively paid to the employee during the short tax year and reported on a Form W-2 for the calendar year with or within that short tax year. With respect to the amounts reported in Box 12, only the portion of the total amount reported that was actually deferred or contributed during the short year can be included in W-2 wages.

      If the taxable income is below the applicable threshold levels (see Q 806), the deduction is simply 20 percent.3

      If the taxable income exceeds the relevant threshold amount, but not by more than $50,000 ($100,000 for joint returns), and the amount determined under (b), above, is less than the amount under (a), above, then the deductible amount is determined without regard to the calculation required under (b). However, the deductible amount allowed under (a) is reduced by the amount that bears the same ratio to the “excess amount” as (1) the amount by which taxable income exceeds the threshold amount bears to (2) $50,000 ($100,000 for joint returns).

      The “excess amount” means the excess of amount determined under (a), above, over the amount determined under (b), above, without regard to the reduction described immediately above.

      “Combined QBI” for the year is the sum of the deductible amounts for each qualified trade or business of the taxpayer and 20 percent of the taxpayer’s qualified REIT dividends and qualified publicly traded partnership income.4

      Qualified REIT dividends do not include any portion of a dividend received from a REIT that is a capital gain dividend or a qualified dividend.5

      “Qualified cooperative dividends” includes a patronage dividend, per-unit retain allocation, qualified written notice of allocation, or any similar amount that is included in gross income and received from (a) a tax-exempt benevolent life insurance association, a mutual ditch or irrigation company, cooperative telephone company, like cooperative organization or a taxable or tax-exempt cooperative that is described in section 1381(a), or (2) a taxable cooperative governed by tax rules applicable to cooperatives before the enactment of subchapter T of the Code in 1962.6

      “Qualified publicly traded partnership income” means the sum of:

      (1)     the net amount of the taxpayer’s allocable share of each qualified item of income, gain, deduction, and loss from a publicly-traded partnership that does not elect to be taxed as a corporation (so long as the item is connected with a U.S. trade or business and is included or allowed in determining taxable income for the year and is not excepted investment-type income, also not including the taxpayer’s reasonable compensation, guaranteed payments for services or Section 707(a) payments for services), and

      (2)     gain recognized by the taxpayer on disposing its interest in the partnership that is treated as ordinary income.7

      See Q 8581Q 8601 for a more detailed discussion of the Section 199A regulations.


      1.     IRC § 199A(a)

      2.     IRC § 199A(b)(2).

      3.     IRC § 199A(b)(3).

      4.     IRC § 199A(b)(1).

      5.     IRC § 199A(e)(3).

      6.     IRC § 199A(e)(4).

      7.     IRC § 199A(e)(5).

  • 808. What is a QSSS? Can an S corporation own a QSSS?

    • An S corporation may own a qualified subchapter S subsidiary (QSSS). A QSSS is a domestic corporation that is not an ineligible corporation, if 100 percent of its stock is owned by the parent S corporation and the parent S corporation elects to treat it as a QSSS. Except as provided in regulations, a QSSS is not treated as a separate corporation and its assets, liabilities, and items of income, deduction, and credit are treated as those of the parent S corporation.1 Regulations provide special rules regarding the recognition of a QSSS as a separate entity for tax purposes if an S corporation or its QSSS is a bank.2 A QSSS will also be treated as a separate corporation for purposes of employment taxes and certain excise taxes.3

      If a QSSS ceases to meet the above requirements, it will be treated as a new corporation acquiring all assets and liabilities from the parent S corporation in exchange for its stock. If the corporation’s status as a QSSS terminates, the corporation is generally prohibited from being a QSSS or an S corporation for five years.4 Regulations provide that in certain cases following a termination of a corporation’s QSSS election, the corporation may be allowed to elect QSSS or S corporation status without waiting five years if, immediately following the termination, the corporation is otherwise eligible to make an S corporation election or QSSS election, and the election is effective immediately following the termination of the QSSS election. Examples where this rule would apply include an S corporation selling all of its QSSS stock to another S corporation, or an S corporation distributing all of its QSSS stock to its shareholders and the former QSSS making an S election.5


      1.     IRC § 1361(b)(3).

      2.     Treas. Reg. § 1.1361-4(a)(3).

      3.     Treas. Reg. § 1.1361-4(a)(7) and §1.1361-4(a)(8).

      4.     IRC § 1361(b)(3).

      5.     Treas. Reg. § 1.1361-5(c).

  • 809. Under what circumstances may an S corporation be taxed at the corporate level?

    • For S elections made after December 17, 1987, a corporation switching from C corporation status to S corporation status may also be required to recapture certain amounts at the corporate level in connection with goods previously inventoried under a LIFO method.1 See Q 810 for a discussion of the changes introduced by the 2017 Tax Act.

      In addition, a tax is imposed at the corporate level on excess “net passive income” of an S corporation (passive investment income reduced by certain expenses connected with the production of such income) but only if the corporation, at the end of the tax year, has accumulated earnings and profits (either carried over from a year in which it was a nonelecting corporation or due to an acquisition of a C corporation), and if passive investment income exceeds 25 percent of gross receipts. The rate is the highest corporate rate (currently 21 percent, decreased from 35 percent prior to 2018).2 “Passive investment income” for this purpose is rents, royalties, dividends, interest, and annuities.3 However, passive investment income does not include rents for the use of corporate property if the corporation also provides substantial services or incurs substantial cost in the rental business,4 or interest on obligations acquired from the sale of a capital asset or the performance of services in the ordinary course of a trade or business of selling the property or performing the services. Also, passive investment income does not include gross receipts derived in the ordinary course of a trade or business of lending or financing; dealing in property; purchasing or discounting accounts receivable, notes, or installment obligations; or servicing mortgages.5 Regulations provide that if an S corporation owns 80 percent or more of a C corporation, passive investment income does not include dividends from the C corporation to the extent the dividends are attributable to the earnings and profits of the C corporation derived from the active conduct of a trade or business.6 If amounts are subject to tax both as built-in gain and as excess net passive income, an adjustment will be made in the amount taxed as passive income.7

      Also, tax is imposed at the corporate level if investment credit attributable to years for which the corporation was not an S corporation is required to be recaptured.8

      Furthermore, an S corporation may be required to make an accelerated tax payment on behalf of its shareholders, if the S corporation elects not to use a required taxable year.9 The corporation is also subject to estimated tax requirements with respect to the tax on built in gain, the tax on excess net passive income and any tax attributable to recapture of investment credit.10


      1.     IRC § 1363(d).

      2.     IRC § 1375(a).

      3.     IRC §§ 1362(d)(3), 1375(b)(3).

      4.     See Let. Ruls. 9837003, 9611009, 9610016, 9548012, 9534024, 9514005.

      5.     Treas. Reg. § 1.1362-2(c)(5).

      6.     Treas. Reg. § 1.1362-8(a).

      7.     IRC § 1375(b)(4).

      8.     IRC § 1371(d).

      9.     IRC § 7519.

      10.   IRC § 6655(g)(4).

  • 810. How did the 2017 Tax Act impact the tax treatment of S corporations that convert to C corporations?

    • Under prior law, if an S corporation converted to a C corporation, distributions of cash by the C corporation to the shareholders during the post-termination transition period were tax-free to the extent of the amount in the company’s accumulated adjustment account. These distributions also reduced the shareholders’ basis in the company’s stock. The “post-termination transition period” was the one-year period after the S corporation election terminated.

      The 2017 Tax Act provides that any accounting adjustments under IRC Section 481(a) that are required because of the revocation of the S corporation election of an “eligible terminated S corporation” (such as changing from the cash to accrual method of accounting) must be taken into account ratably during the six tax years beginning with the year of the change.1

      An “eligible terminated S corporation” is defined as any C corporation which (1) was an S corporation the day before the enactment of the 2017 Tax Act (i.e., December 21, 2017), (2) during the two-year period beginning on December 22, 2017 revokes its S corporation election under IRC Section 1362(a), and (3) where all of the owners of the corporation on December 22, 2017 are the same as on the day the election is revoked (in identical proportions).2 The corporation’s S status cannot be terminated in any other way—it must be revoked. The IRS released proposed regulations late in 2019 intended to codify this rule.3

      Under Revenue Procedure 2018-44, an eligible terminated S corporation is required to take a positive or negative Section 481(a) adjustment ratably over six years beginning with the year of change if the corporation (1) is required to change from the cash method to accrual method and (2) makes the accounting method change for the C corporation’s first tax year. An eligible terminated S corporation is permitted (but not required) to take a positive or negative Section 481(a) adjustment ratably over six years beginning with the year of change if the eligible terminated S corporation (1) is permitted to continue using the cash method of accounting after termination of its S status, and (2) changes to the overall accrual method of accounting for the C corporation’s first tax year.

      Under the new rules, if there is a distribution of cash by an eligible terminated S corporation, the accumulated adjustments account will be allocated to that distribution, and the distribution will be chargeable to accumulated earnings and profits, in the same ratio as the amount of the accumulated adjustments account bears to the amount the accumulated earnings and profits.4 Under the proposed regulations, the corporation uses a “snapshot approach” to determining this ratio—meaning that it is determined only once and the same ratio is used until the relevant balance is reduced to zero. Ratios are determined on the day the S corporation revokes its S election. The proposed regulations are not currently applicable, and will not be applicable until finalized.

      The IRS has clarified that cash distributions made by a former S corporation during the entity’s post-termination period in redemption of its stock reduce the adjusted basis in the stock to the extent that the distribution does not exceed the accumulated adjustments account value. This is the case if the distribution is treated as subject to Section 301, rather than as a distribution in exchange of stock. The amount of the distribution value that exceeds the accumulated adjustments account is treated as a dividend. In the case at hand, the S corporation’s S election terminated so that the entity became a C corporation. A single taxpayer owned all outstanding shares, and the corporation redeemed half of those shares for cash during the post-termination transition period.5


      1.     IRC § 481(d)(1).

      2.     IRC § 481(d)(2).

      3.     REG-131071-18.

      4.     IRC § 1371(f).

      5.     Rev. Rul. 2019-13.

  • 811. How is an S corporation shareholder’s basis in the S corporation stock calculated?

    • The basis of each shareholder’s stock is increased by his share of items of separately stated income (including tax-exempt income), by his share of any nonseparately computed income, and by any excess of deductions for depletion over basis in property subject to depletion.1 An S corporation shareholder may not increase his basis due to excluded discharge of indebtedness income.2 The basis of each shareholder’s stock is decreased (not below zero) by (1) items of distributions from the corporation that are not includable in the income of the shareholder, (2) separately stated loss and deductions and nonseparately computed loss, (3) any expense of the corporation not deductible in computing taxable income and not properly chargeable to capital account, and (4) any depletion deduction with respect to oil and gas property to the extent that the deduction does not exceed the shareholder’s proportionate share of the property’s adjusted basis.

      For tax years beginning after 2005, if an S corporation makes a charitable contribution of property, each shareholder’s basis is reduced by the pro rata share of their basis in the property.3 This treatment was made permanent by the Protecting Americans from Tax Hikes Act of 2015 (PATH). If the aggregate of these amounts exceeds his basis in his stock, the excess reduces the shareholder’s basis in any indebtedness of the corporation to him.4 A shareholder may not take deductions and losses of the S corporation that, when aggregated, exceed his basis in his S corporation stock plus his basis in any indebtedness of the corporation to him.5 Such disallowed deductions and losses may be carried over.6 In other words, the shareholder may not deduct in any tax year more than he has “at risk” in the corporation.

      Generally, earnings of an S corporation are not treated as earnings and profits. A corporation may have accumulated earnings and profits for any year in which a valid election was not in effect or as the result of a corporate acquisition in which there is a carryover of earnings and profits under IRC Section 381.7 Corporations that were S corporations before 1983 but were not S corporations in the first tax year after 1996 are able to eliminate earnings and profits that were accumulated before 1983 in their first tax year beginning after May 25, 2007.8

      A distribution from an S corporation that does not have accumulated earnings and profits lowers the shareholder’s basis in the corporation’s stock.9 Any excess is generally treated as gain.10

      If the S corporation does have earnings and profits, distributions are treated as distributions by a corporation without earnings and profits, to the extent of the shareholder’s share of an accumulated adjustment account (i.e., post-1982 gross receipts less deductible expenses, which have not been distributed). Any excess distribution is treated under the usual corporate rules. That is, it is a dividend up to the amount of the accumulated earnings and profits. Any excess is applied to reduce the shareholder’s basis. Finally, any remainder is treated as a gain.11 However, in any tax year, shareholders receiving the distribution may, if all agree, elect to have all distributions in the year treated first as dividends to the extent of earnings and profits and then as return of investment to the extent of adjusted basis and any excess as capital gain.12 If the IRC Section 1368(e)(3) election is made, it will apply to all distributions made in the tax year.13

      Certain distributions from an S corporation in redemption of stock receive sale/exchange treatment. (Generally, only gain or loss, if any, is recognized in a sale.) In general, redemptions that qualify for “exchange” treatment include redemptions not essentially equivalent to a dividend, substantially disproportionate redemptions of stock, complete redemptions of stock, certain partial liquidations, and redemptions of stock to pay estate taxes.14

      If the S corporation distributes appreciated property to a shareholder, gain will be recognized to the corporation as if the property was sold at fair market value, and the gain will pass through to shareholders like any other gain.15

      The rules discussed above generally apply in tax years beginning after 1982. Nonetheless, certain casualty insurance companies and certain corporations with oil and gas production will continue to be taxed under the rules applicable to Subchapter S corporations prior to these rules.16


      1.     IRC § 1367(a)(1).

      2.     IRC § 108(d)(7)(A).

      3.     IRC § 1367(a)(2), as amended by TEAMTRA 2008 and ATRA.

      4.     IRC. § 1367(b)(2)(A).

      5.     IRC § 1366(d)(1).

      6.     IRC § 1366(d)(2).

      7.     IRC § 1371(c).

      8.     SBWOTA 2007 § 8235.

      9.     IRC § 1367(a)(2)(A).

      10.   IRC § 1368(b).

      11.   IRC § 1368(c).

      12.   IRC § 1368(e)(3).

      13.   Let. Rul. 8935013.

      14.   See IRC §§ 302, 303.

      15.   IRC §§ 1371(a), 311(b).

      16.   Subchapter S Revision Act of 1982, § 6.

  • 812. How is a “personal service corporation” taxed?

    • Editor’s Note: The 2017 Tax Act eliminated the special tax treatment that previously applied to personal service corporations. As such, these corporations are now subject to the same flat 21 percent tax rate that applies to C corporations.

      Prior to 2018, certain personal service corporations were taxed at a flat rate of 35 percent.1 In effect, this meant that the benefit of the graduated corporate income tax rates was not available. For tax years beginning after December 31, 2017, personal service corporations are taxed at the 21 percent corporate rate.

      A personal service corporation for this purpose is a corporation in which substantially all corporate activities involve the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting. In addition, substantially all of the stock must be owned (1) directly by employees, retired employees, or their estates or (2) indirectly through partnerships, S corporations, or qualified personal service corporations.2

      IRC Section 269A permits the IRS to reallocate income, deductions, credits, exclusions, and other allowances (to the extent necessary to prevent avoidance or evasion of federal income tax) between a personal service corporation (PSC) and its employee-owners if the corporation is formed for the principal purpose of securing tax benefits for its employee-owners (i.e., more than 10 percent shareholder-employees after application of attribution rules) and substantially all of its services are performed for a single other entity. For purposes of IRC Section 269A, a personal service corporation is a corporation the principal activity of which is the performance of personal services and such services are substantially performed by the employee-owners.3 A professional basketball player was considered to be an employee of an NBA team, not his personal service corporation, and all compensation from the team was taxable to him individually, even though his PSC had entered into a contract with the team for his personal services.4

      In addition, special rules apply to the tax year that may be used by a personal service corporation (as defined for purposes of IRC Section 269A, except that all owner-employees are included and broader attribution rules apply).5


      1.     IRC § 11(b)(2), prior to repeal by Pub. Law No. 115-97 (the 2017 Tax Act).

      2.     IRC § 448(d)(2).

      3.     IRC § 269A(b)(1).

      4.     Leavell v. Comm., 104 TC 140 (1995).

      5.     IRC §§ 441(i), 444.

  • 813. What is a limited liability company and how is it taxed?

    • A limited liability company (LLC) is a statutory business entity that may be formed by at least two members (although one-member LLCs are permitted in some states) by drafting articles of organization and filing them with the appropriate state agency. There are no provisions for LLCs in the Code, but regulations provide rules to determine how a business entity is classified for tax purposes. A business entity is any entity recognized for federal tax purposes that is not a trust. Unlike an S corporation, an LLC has no restrictions on the number or types of owners and multiple classes of ownership are generally permitted. If the LLC is treated as a partnership, it combines the liability shield of a corporation with the tax advantages of a partnership.

      An LLC may be treated as either a corporation (see Q 798), partnership (see Q 814), or sole proprietorship for federal income tax purposes. A sole proprietor and his business are one and the same for tax purposes. An eligible entity (a business entity not subject to automatic classification as a corporation) may elect corporate taxation by filing an entity classification form; otherwise it will be taxed as either a partnership or sole proprietorship depending upon how many owners are involved.

      A separate entity must exist for tax purposes, in that its participants must engage in a business for profit. Trusts are not considered business entities.1 Certain entities, such as corporations organized under a federal or state statute, insurance companies, joint stock companies, and organizations engaged in banking activities, are automatically classified as corporations for federal tax purposes. A business entity with only one owner will be considered a corporation or a sole proprietorship. In order to be classified as a partnership, the entity must have at least two owners.2 If a newly-formed domestic eligible entity with more than one owner does not elect to be taxed as a corporation, it will be classified as a partnership. Likewise, if a newly-formed single-member eligible entity does not elect to be taxed as a corporation, it will be taxed as a sole proprietorship. Under most circumstances, a corporation in existence on January 1, 1997 does not need to file an election in order to retain its corporate status.3

      If a business entity elects to change its classification, rules are provided for how the change is treated for tax purposes.4

      Revenue Ruling 95-375 provides that a partnership converting to a domestic LLC will be treated as a partnership-to-partnership conversion (and therefore be “tax-free”) provided that the LLC is classified as a partnership for federal tax purposes. The partnership will not be considered terminated under IRC Section 708(b) upon its conversion to an LLC so long as the business of the partnership is continued after the conversion. Further, there will be no gain or loss recognized on the transfer of assets and liabilities so long as each partner’s percentage of profits, losses and capital remains the same after the conversion. The same is true for a limited partnership converting to an LLC.6

      An LLC formed by two S corporations was classified as a partnership for federal tax purposes.7 An S corporation may merge into an LLC without adverse tax consequences provided the LLC would not be treated as an investment company under IRC Section 351 and the S corporation would not realize a net decrease in liabilities exceeding its basis in the transferred assets pursuant to Treasury Regulation Section 1.752-1(f). Neither the S corporation nor the LLC would incur gain or loss upon the contribution of assets by the S corporation to the LLC in exchange for interests therein pursuant to IRC Section 721.8 A corporation will retain its S election when it transfers all assets to an LLC, which is classified as a corporation for federal tax purposes due to a preponderance of corporate characteristics (see below), provided the transfer qualifies as a reorganization under IRC Section 368(a)(1)(F) and the LLC meets the requirements of an S corporation under IRC Section 1361.9

      An LLC that was in existence prior to January 1, 1997, may continue under its previous claimed classification if it meets the following requirements: (1) it had a reasonable basis for the classification; (2) the entity and its members recognized the consequences of any change in classification within the 60 months prior to January 1, 1997; and (3) neither the entity nor its members had been notified that the classification was under examination by the IRS.10

      Prior to January 1, 1997, whether an LLC was treated as a corporation or partnership for federal income tax purposes depended on the existence or nonexistence of a preponderance of six corporate characteristics: (1) associates; (2) an objective to carry on a business and divide the gains from it; (3) limited liability; (4) free transferability of interests; (5) continuity of life; and (6) centralized management.11 Characteristics (1) and (2) above are common to both corporations and partnerships and were generally discounted when determining whether an organization was treated as a corporation or partnership.12 These former regulations provided an example of a business entity that possessed the characteristics of numbers (1), (2), (4) and (6) above, noting that since numbers (1) and (2) were common to both corporations and partnerships, these did not receive any significant consideration. The business entity did not possess characteristics (3) and (5) above and, accordingly, was labeled a partnership.13

      See Q 815 and Q 816 for a discussion of how the 2017 Tax Act impacted the taxation of LLCs that are taxed as partnerships.


      1.     Treas. Reg. §301.7701-1.

      2.     Treas. Reg. §301.7701-2.

      3.     Treas. Reg. §301.7701-3.

      4.     Treas. Reg. §301.7701-3(g).

      5.     1995-1 CB 130.

      6.     Let. Rul. 9607006.

      7.     Let. Rul. 9529015.

      8.     Let. Rul. 9543017.

      9.     Let. Rul. 9636007.

      10.   Treas. Reg. §301.7701-3(h)(2).

      11.   Treas. Reg. §301.7701-2(a)(1), as in effect prior to January 1, 1997.

      12.   Treas. Reg. §301.7701-2(a)(2), as in effect prior to January 1, 1997.

      13.   Treas. Reg. §301.7701-2(a)(3), as in effect prior to January 1, 1997.

  • 814. How is the income from a partnership taxed?

    • Editor’s Note: See Q 815 to Q 816 for a discussion of the changes to pass-through taxation that were implemented under the 2017 tax reform legislation.

      With the exception of certain publicly traded partnerships, a partnership, as such, is not taxed.1 However, the partnership must file an information return on Form 1065, showing taxable ordinary income or loss and capital gain or loss. The partnership is regarded as an entity for the purpose of computing taxable income, and business expenses of the partnership may be deducted. In general, prior to the 2017 Tax Act, taxable income was computed in the same manner as for individuals; but the standard deduction, personal exemptions, and expenses of a purely personal nature are not allowed.2 The deduction for production activities may also have been allowed prior to its repeal for tax years beginning in 2018 and beyond (see Q 798).

      Each partner must report his share of partnership profits, whether distributed or not, on his individual return. A partner’s distributive share is determined either on the basis of the partner’s interest or by allocation under the partnership agreement. Allocation by agreement must have a “substantial economic effect.” Special allocation rules apply where the partner’s interest changes during the year.3

      A person is a partner if he owns a capital interest in a partnership in which capital is a material income-producing factor, whether he acquired his interest by purchase or gift. Generally, such a person will be taxable on his share of partnership profits. If capital is not an income-producing factor, the transfer of a partnership interest to a family member may be disregarded as an ineffective assignment of income, rather than an assignment of property from which income is derived. Where an interest is acquired by gift (an interest purchased by one family member from another is considered to have been acquired by gift), allocation of income among the partners according to the partnership agreement will not control to the extent that: (1) it does not allow a reasonable salary for the donor of the interest; or (2) the income attributable to the capital share of the donee is proportionately greater than the income attributable to the donor’s capital share.4 The transfer must be complete and the family member donee must have control over the partnership interest consistent with the status of partner. If he is not old enough to serve in the capacity of partner, his interest must be controlled by a fiduciary for his benefit.

      A “qualified joint venture” that is carried out by two spouses may elect to treat their business as two sole proprietorships and not as a partnership. A qualified joint venture is any joint venture conducting a trade or business where the only owners are the two spouses, both spouses materially participate in the business, and both spouses elect to opt out of the partnership taxation rules. Items of income, gain, loss, deduction, and credit must be divided between the spouses according to their respective interests in the business.5

      A partnership which is traded on an established securities market, known as a publicly traded partnership, is taxed differently than a partnership in some instances.6

      See Q 736 to Q 737 for a discussion of how the deduction of business interest is treated under the 2017 Tax Act.


      1.     IRC § 701.

      2.     IRC §§ 703(a), 63(c)(6)(D).

      3.     IRC §§ 706(d), 704(b).

      4.     IRC § 704(e).

      5.     IRC § 761(f).

      6.     IRC § 7704.

  • 815. How is the income from a partnership taxed under the 2017 tax reform legislation?

    • The 2017 Tax Act made substantial changes to the treatment of pass-through business income, which was previously “passed through” and taxed at the business owners’ individual ordinary income tax rates. Partnerships (and entities that elect partnership taxation, such as certain LLCs), S corporations and sole proprietorships are subject to the post-reform pass-through taxation rules, which apply for tax years beginning after December 31, 2017 and before December 31, 2025.1 The rules are complicated, and the IRS and related agencies have released extensive interpretive materials explaining how the provisions will be applied. See Q 8581 to Q 8601 for a discussion of the Section 199A regulations.

      Partners in a partnership may generally deduct 20 percent of “qualified business income (QBI)”2 (which generally excludes “specified service business” income (see below)).

      Partnerships that are categorized as service businesses and have income below the applicable threshold level plus $50,000 ($100,000 for joint returns) also qualify for the deduction. The applicable threshold levels for 2024 are $383,900 (joint returns) and $191,950 (single returns), so service business owners with income that exceeds $483,900 (joint returns) and $241,950 (single) will note receive the benefit of the deduction. The applicable threshold levels for 2023 were $364,200 (joint returns) and $182,100 (single filers), so service business owners with income that exceeds $464,200 (joint returns) and $232,100 (single) will not receive the benefit of the deduction. The applicable threshold levels for 2022 were $340,100 (joint returns), and $170,050 (single returns), so service business owners with income that exceeds $440,100 (joint returns) or $220,050 (single) in 2022 did not receive the benefit of the deduction. The applicable threshold levels for 2021 were $329,800 (joint returns), and $164,900 (single returns), and the numbers in 2020 were $326,600 or $163,300. The entirety of the taxpayer’s income must be taken into account (not only the business’ income).3

      The deduction is available regardless of whether the taxpayer itemizes, and is applied based on ownership interest (i.e., a partner who owns 25 percent of a partnership is entitled to apply the deduction to 25 percent of his or her QBI). The calculation is made on an entity-specific basis, meaning that the deduction must be applied separately to each entity rather than based upon the cumulative income of all entities owned by the taxpayer.

      Qualified business income is generally the net amount of qualified items of income, gain, deduction and loss with respect to qualified trades or businesses of the taxpayer, excluding qualified REIT dividends, qualified cooperative dividends and qualified publicly traded partnership income (but see Q 816).4 Income, gain, deduction and loss items are generally qualified if they are connected with a U.S. trade or business and are included or allowed in calculating taxable income. Amounts related to the following investment items are excluded: capital gains, qualified dividend income (or equivalent), non-business interest income, foreign base company income taken into account under IRC Section 954(c), non-business annuity distributions.5

      For alternative minimum tax purposes, qualified business income is calculated without regard to otherwise allowable adjustments.6

      When the pass-through entity’s income exceeds the $321,400/$160,700 threshold, the deduction is capped at the greater of (1) 50 percent of W-2 wage income or (2) the sum of 25 percent of the W-2 wages of the business plus 2.5 percent of the unadjusted basis, immediately after acquisition, of all “qualified property” (but see Q 816 for a discussion of the “phase-in” for certain taxpayers whose income only exceeds the threshold by $50,000 ($100,000 for joint returns)).7


      Planning Point: IRS guidance provides that the term “W-2 wages” includes only income properly reported to the Social Security Administration on Form W-2 within 60 days of the deadline for filing the form, including extensions. The filing deadline is generally January 31, giving most businesses until April 1 to file the form in order to count the wages for Section 199A purposes.8


      “Qualified property” generally includes depreciable property that is used in the taxpayer’s trade or business for the production of income as of the end of the tax year, as long as the depreciation period has not expired before the end of that year. The depreciation period is a period that begins on the first day that the taxpayer places the property in service and ends the later of (1) 10 years after that date or (2) the last day of the last full year in the applicable recovery period that would apply to the property under IRC Section 168 (without regard to Section 168(g)).9

      A “specified service business” is a trade or business involving the performance of services in the fields of health, law, consulting, athletics, financial services, brokerage services or any trade or business where the principal asset of the business is the reputation or skill of one or more employees or workers, or one which involves the performance of services consisting of investing and investment management trading or dealing in securities, partnership interests or commodities.

      To determine the “qualified business income” with respect to a specified service trade or business, the taxpayer takes into account only the applicable percentage of qualified items of income, gain, deduction, or loss, and of allocable W-2 wages.10 With respect to S corporations, qualified business income does not include any amounts that are treated as reasonable compensation of the taxpayer. Similarly, qualified business income does not include guaranteed payments or amounts paid or incurred by a partnership to a partner, when the partner is providing services and is not acting in his or her capacity as a partner.11


      Planning Point: Qualified business income (QBI) excludes pass-through income that is categorized as “compensation” or a “guaranteed payment”. The 20 percent deduction applies only to QBI.

      It remains to be seen whether safeguards will be put into place to discourage partnerships from categorizing more business income as partnership profits (i.e., reduce guaranteed payments that would be treated in the same manner as excluded compensation in order to increase QBI and take advantage of the 20 percent deduction with respect to those funds. Currently existing “reasonable compensation” rules apply only to S corporations and C corporations, and have not been specifically extended into the partnership arena.


      If the qualified business income for the year is a loss, it is carried forward as a loss for the next tax year. Any deduction allowed for that subsequent tax year is reduced by 20 percent of any carried forward business loss from the previous year.12

      The deduction is allowed as a reduction reducing taxable income, rather than as a deduction in computing adjusted gross income (i.e., the deduction does not impact limitations based on adjusted gross income). Further, trusts and estates are also eligible for the 20 percent deduction.

      For partnerships and S corporations, these rules apply at the partner or shareholder level (each partner is treated as having W-2 wages for the year equal to that partner’s allocable share of the partnership).

      See Q 816 for a detailed discussion of how a pass-through entity’s deduction for qualified business income is determined.


      1.     Under IRC § 199A.

      2.     IRC § 199A(a).

      3.     IRC §§ 199A(b)(3), 199A(d)(2).

      4.     IRC § 199A(c).

      5.     IRC §§ 199A(c)(3), 199A(d)(3).

      6.     IRC § 199A(f)(2).

      7.     IRC § 199A(b)(2). In the case of a short taxable year, only those W-2 wages paid during the short taxable year count under Treasury Regulation §1.199A-2(b)(iv)(C).

      8.     Rev. Proc. 2019-11.

      9.     IRC § 199A(b)(6). IRC Section 168 provides accelerated cost recovery system rules. IRC Section 168(g) provides an alternate depreciation system that may be used with respect to certain property, including tangible property used predominantly outside the U.S., tax-exempt use property and tax-exempt bond financed property.

      10.   As defined in IRC § 199A(b)(4).

      11.   IRC § 199A(c)(4).

      12.   IRC § 199A(c)(2).

  • 816. How is a partnership’s deduction for qualified business income determined?

    • Owners of entities that are taxed under the rules governing pass-through taxation are generally entitled to a 20 percent deduction for qualified business income (see Q 815). This deduction is equal to the sum of:

      (a)    the lesser of the combined qualified business income amount for the tax year or an amount equal to 20 percent of the excess of the taxpayer’s taxable income over any net capital gain and cooperative dividends, plus

      (b)    the lesser of 20 percent of qualified cooperative dividends or taxable income (reduced by net capital gain).1

      The sum discussed above may not exceed the taxpayer’s taxable income for the tax year (reduced by net capital gain). Further, the 20 percent deduction with respect to qualified cooperative dividends is limited to taxable income (reduced by net capital gain).

      The deductible amount for each qualified trade or business is the lesser of:

      (a)    20 percent of the qualified business income with respect to the trade or business or

      (b)    the greater of (x) 50 percent of W-2 wage income or (y) the sum of 25 percent of the W-2 wages of the business plus 2.5 percent of the unadjusted basis, immediately after acquisition, of all qualified property (see Q 815).2


      Planning Point: The regulations provide guidance on how UBIA is calculated in the case of a like-kind exchange or involuntary conversion. The regulations follow the Section 168 regulations in providing that property acquired in a like-kind exchange, or by conversion, is treated as MACRS property, so that the depreciation period is determined using the date the relinquished property was first placed into service unless an exception applies. The exception applies if the taxpayer elected not to apply Treasury Regulation §1.168(i)-6. As a result, most property acquired in a like-kind exchange or involuntary conversion under the new rules will have two relevant placed in-service dates. For calculating UBIA, the relevant date is the date the taxpayer places the property into service. For calculating its depreciable period, the relevant date is the date the taxpayer placed the original, relinquished property into service.


      Concurrently with the proposed regulations, the IRS released Notice 2018-64, which contains a proposed revenue procedure (finalized by Rev. Proc. 2019-11) with guidance for calculating W-2 wages for purposes of the Section 199A deduction for qualified business income. The guidance provides three methods for calculating W-2 wages, including the “unmodified box method”, the “modified Box 1 method”, and the “tracking wages method”. The guidance further specifies that wages calculated under these methods are only taken into account in determining the W-2 wage limitations if properly allocable to QBI under Treasury Regulation §1.199A-2(g).

      The unmodified box method involves taking the lesser of (1) the total of Box 1 entries for all W-2 forms or (2) the total of Box 5 entries for all W-2 forms (in either case, those that were filed with the SSA by the taxpayer for the year). Under the modified Box 1 method, the taxpayer subtracts from its total Box 1 entries amounts that are not wages for federal income tax withholding purposes, and then adds back the total of Box 12 entries for certain employees. The tracking wages method requires the taxpayer to actually track employees’ wages, and (1) total the wages subject to income tax withholding and (2) subtract the total of all Box 12 entries of certain employees.

      If the taxable income is below the applicable threshold levels ($364,200 for joint returns and $182,100 for single returns in 2023, $340,100 for joint returns and $170,050 for single files in 2022; in 2021, $329,800 for joint returns and $164,900 for single filers), the deduction is simply 20 percent.3

      If the taxable income exceeds the relevant threshold amount, but not by more than $50,000 ($100,000 for joint returns), and the amount determined under (b), above, is less than the amount under (a), above, then the deductible amount is determined without regard to the calculation required under (b). However, the deductible amount allowed under (a) is reduced by the amount that bears the same ratio to the “excess amount” as (1) the amount by which taxable income exceeds the threshold amount bears to (2) $50,000 ($100,000 for joint returns).

      The “excess amount” means the excess of the amount determined under (a), above, over the amount determined under (b), above, without regard to the reduction described immediately above.

      Example: Marty (a taxpayer who is subject to the W-2 wages and capital limit) does business as a sole proprietorship conducting a widget-making business. The business buys a widget-making machine for $100,000 and places it in service in 2024. The business has no employees in 2024. The limitation in 2024 is the greater of (a) 50 percent of W-2 wages, or $0, or (b) the sum of 25 percent of W-2 wages ($0) plus 2.5 percent of the unadjusted basis of the machine immediately after its acquisition: $100,000 × .025 = $2,500. The amount of the limitation on Marty’s deduction is $2,500.4

      “Combined qualified business income” for the year is the sum of the deductible amounts for each qualified trade or business of the taxpayer and 20 percent of the taxpayer’s qualified REIT dividends and qualified publicly traded partnership income.5

      Qualified REIT dividends do not include any portion of a dividend received from a REIT that is a capital gain dividend or a qualified dividend.6

      “Qualified cooperative dividends” includes a patronage dividend, per-unit retain allocation, qualified written notice of allocation, or any similar amount that is included in gross income and received from (a) a tax-exempt benevolent life insurance association, a mutual ditch or irrigation company, cooperative telephone company, like cooperative organization or a taxable or tax-exempt cooperative that is described in section 1381(a), or (2) a taxable cooperative governed by tax rules applicable to cooperatives before the enactment of subchapter T of the Code in 1962.7

      “Qualified publicly traded partnership income” means the sum of:

      (1)    the net amount of the taxpayer’s allocable share of each qualified item of income, gain, deduction, and loss from a publicly-traded partnership that does not elect to be taxed as a corporation (so long as the item is connected with a U.S. trade or business and is included or allowed in determining taxable income for the year and is not excepted investment-type income, also not including the taxpayer’s reasonable compensation, guaranteed payments for services or Section 707(a) payments for services), and

      (2)    gain recognized by the taxpayer on disposing its interest in the partnership that is treated as ordinary income.8

      Example: H and W file a joint return on which they report taxable income of $520,000 (determined without regard to this provision). H is a partner in a qualified trade or business that is not a specified service business (“qualified business A”). W has a sole proprietorship qualified trade or business that is a specified service business (“qualified business B”). H and W also received $10,000 in qualified REIT dividends during the tax year.

      H’s allocable share of qualified business income from qualified business A is $300,000, such that 23 percent of the qualified business income with respect to the business is $69,000. H’s allocable share of wages paid by qualified business A is $100,000, such that 50 percent of the W-2 wages with respect to the business is $50,000. As H and W’s taxable income is above the threshold amount for a joint return, the application of the wage limit for qualified business A is phased in. Accordingly, the $69,000 amount is reduced by 20 percent of the difference between $69,000 and $50,000, or $3,800. H’s deductible amount for qualified business A is $65,200.

      W’s qualified business income and W-2 wages from qualified business B, which is a specified service business, are $325,000 and $150,000, respectively. H and W’s taxable income is above the threshold amount for a joint return. Thus, the exclusion of qualified business income and W-2 wages from the specified service business are phased in. W has an applicable percentage of 80 percent. In determining includible qualified business income, W takes into account 80 percent of $325,000, or $260,000. In determining includible W-2 wages, W takes into account 80 percent of $150,000, or $120,000. W calculates the deductible amount for qualified business B by taking the lesser of 23 percent of $260,000 ($59,800) or 50 percent of includible W-2 wages of $120,000 ($60,000). W’s deductible amount for qualified business B is $59,800.

      H and W’s combined qualified business income amount of $127,300 is comprised of the deductible amount for qualified business A of $65,200, the deductible amount for qualified business B of $59,800, and 23 percent of the $10,000 qualified REIT dividends ($2,300). H and W’s deduction is limited to 23 percent of their taxable income for the year ($520,000), or $119,600. Accordingly, H and W’s deduction for the taxable year is $119,600.9


      1.     IRC § 199A(a)

      2.     IRC § 199A(b)(2).

      3.     IRC § 199A(b)(3).

      4.     Example taken from the Conference Report on the 2017 Tax Act.

      5.     IRC § 199A(b)(1).

      6.     IRC § 199A(e)(3).

      7.     IRC § 199A(e)(4).

      8.     IRC § 199A(e)(5).

      9.     Example taken from the Conference Report on the 2017 Tax Act.