Determination of shareholder’s tax liability
In general
Nonseparately computed income or loss defined
For purposes of this subchapter, the term “nonseparately computed income or loss” means gross income minus the deductions allowed to the corporation under this chapter, determined by excluding all items described in paragraph (1)(A).
Character passed thru
The character of any item included in a shareholder’s pro rata share under paragraph (1) of subsection (a) shall be determined as if such item were realized directly from the source from which realized by the corporation, or incurred in the same manner as incurred by the corporation.
Gross income of a shareholder
In any case where it is necessary to determine the gross income of a shareholder for purposes of this title, such gross income shall include the shareholder’s pro rata share of the gross income of the corporation.
Special rules for losses and deductions
Cannot exceed shareholder’s basis in stock and debt
Indefinite carryover of disallowed losses and deductions
In general
Except as provided in subparagraph (B), any loss or deduction which is disallowed for any taxable year by reason of paragraph (1) shall be treated as incurred by the corporation in the succeeding taxable year with respect to that shareholder.
Transfers of stock between spouses or incident to divorce
In the case of any transfer described in section 1041(a) of stock of an S corporation, any loss or deduction described in subparagraph (A) with respect such stock shall be treated as incurred by the corporation in the succeeding taxable year with respect to the transferee.
Carryover of disallowed losses and deductions to post-termination transition period
In general
If for the last taxable year of a corporation for which it was an S corporation a loss or deduction was disallowed by reason of paragraph (1), such loss or deduction shall be treated as incurred by the shareholder on the last day of any post-termination transition period.
Cannot exceed shareholder’s basis in stock
The aggregate amount of losses and deductions taken into account by a shareholder under subparagraph (A) shall not exceed the adjusted basis of the shareholder’s stock in the corporation (determined at the close of the last day of the post-termination transition period and without regard to this paragraph).
Adjustment in basis of stock
The shareholder’s basis in the stock of the corporation shall be reduced by the amount allowed as a deduction by reason of this paragraph.
At-risk limitations
To the extent that any increase in adjusted basis described in subparagraph (B) would have increased the shareholder’s amount at risk under section 465 if such increase had occurred on the day preceding the commencement of the post-termination transition period, rules similar to the rules described in subparagraphs (A) through (C) shall apply to any losses disallowed by reason of section 465(a).
Application of limitation on charitable contributions
Treatment of family group
If an individual who is a member of the family (within the meaning of section 704(e)(2) of one or more shareholders of an S corporation renders services for the corporation or furnishes capital to the corporation without receiving reasonable compensation therefor, the Secretary shall make such adjustments in the items taken into account by such individual and such shareholders as may be necessary in order to reflect the value of such services or capital.
Special rules
Subsection (a) not to apply to credit allowable under section 34
Subsection (a) shall not apply with respect to any credit allowable under section 34 (relating to certain uses of gasoline and special fuels).
Treatment of tax imposed on built-in gains
If any tax is imposed under section 1374 for any taxable year on an S corporation, for purposes of subsection (a), the amount so imposed shall be treated as a loss sustained by the S corporation during such taxable year. The character of such loss shall be determined by allocating the loss proportionately among the recognized built-in gains giving rise to such tax.
Reduction in pass-thru for tax imposed on excess net passive income
Pub. L. 97–354, § 296 Stat. 1677Pub. L. 98–369, div. A, title IV, § 474(r)(26)98 Stat. 844Pub. L. 99–514, title VI, § 632(c)(2)100 Stat. 2277Pub. L. 100–647, title I, § 1006(f)(5)(E)102 Stat. 3406Pub. L. 101–239, title VII, § 7811(c)(7)103 Stat. 2407Pub. L. 104–188, title I110 Stat. 1779Pub. L. 108–357, title II, § 235(a)118 Stat. 1435Pub. L. 110–172, § 3(b)121 Stat. 2474Pub. L. 115–141, div. U, title IV, § 401(a)(192)132 Stat. 1193(Added , , ; amended , title VII, § 735(c)(16), , , 985; , title VII, § 701(e)(4)(K), , , 2343; , , ; , , ; , §§ 1302(e), 1307(c)(3)(A), 1309(a)(1), 1312, , , 1782, 1783, 1784; , , ; , , ; , , .)
Editorial Notes
Amendments
Pub. L. 115–1412018—Subsec. (e). substituted “section 704(e)(2)” for “section 704(e)(3)”.
Pub. L. 110–1722007—Subsec. (d)(4). added par. (4).
Pub. L. 108–3572004—Subsec. (d)(2). reenacted heading without change and amended text of par. (2) generally. Prior to amendment, text read as follows: “Any loss or deduction which is disallowed for any taxable year by reason of paragraph (1) shall be treated as incurred by the corporation in the succeeding taxable year with respect to that shareholder.”
Pub. L. 104–188, § 1302(e)1996—Subsec. (a)(1). , inserted “, or of a trust or estate which terminates,” after “who dies” in introductory provisions.
Pub. L. 104–188, § 1309(a)(1)Subsec. (d)(1)(A). , substituted “paragraphs (1) and (2)(A)” for “paragraph (1)”.
Pub. L. 104–188, § 1312Subsec. (d)(3)(D). , added subpar. (D).
Pub. L. 104–188, § 1307(c)(3)(A)Subsec. (g). , struck out subsec. (g) which provided a cross reference to subchapter D of chapter 63 of this title.
Pub. L. 101–2391989—Subsec. (f)(2). substituted “Treatment of tax imposed on built-in gains” for “Reduction in pass-thru for tax imposed on built-in gains” in heading and amended text generally. Prior to amendment, text read as follows: “If any tax is imposed under section 1374 for any taxable year on an S corporation, for purposes of subsection (a), the amount of each recognized built-in gain (within the meaning of section 1374) for such taxable year shall be reduced by its proportionate share of such tax.”
Pub. L. 100–6471988—Subsec. (f)(2). substituted “within the meaning of section 1374” for “as defined in section 1374(d)(2)”.
Pub. L. 99–514, § 632(c)(2)1986—Subsec. (f)(2). , amended par. (2) generally. Prior to amendment, par. (2), reduction in pass-thru for tax imposed on capital gain, read as follows: “If any tax is imposed under section 1374 for any taxable year on an S corporation, for purposes of subsection (a)—
“(A) the amount of the corporation’s long-term capital gains for the taxable year shall be reduced by the amount of such tax, and
“(B) if the amount of such tax exceeds the amount of such long-term capital gains, the corporation’s gains from sales or exchanges of property described in section 1231 shall be reduced by the amount of such excess.
For purposes of the preceding sentence, the term ‘long-term capital gain’ shall not include any gain from the sale or exchange of property described in section 1231.”
Pub. L. 99–514, § 701(e)(4)(K), struck out “56 or” before “1374”.
Pub. L. 98–369, § 474(r)(26)1984—Subsec. (f). , substituted “section 34” for “section 39” in heading and text.
Pub. L. 98–369, § 735(c)(16)Subsec. (f)(1). , substituted “and special fuels” for “, special fuels, and lubricating oil”.
Statutory Notes and Related Subsidiaries
Effective Date of 2007 Amendment
Pub. L. 110–172Pub. L. 109–280section 3(j) of Pub. L. 110–172section 170 of this titleAmendment by effective as if included in the provisions of the Pension Protection Act of 2006, , to which such amendment relates, see , set out as a note under .
Effective Date of 2004 Amendment
Pub. L. 108–357, title II, § 235(b)118 Stat. 1435Pub. L. 109–135, title IV, § 403(c)119 Stat. 2620
Effective Date of 1996 Amendment
Pub. L. 104–188section 1317(a) of Pub. L. 104–188section 641 of this titleAmendment by applicable to taxable years beginning after , see , set out as a note under .
Effective Date of 1989 Amendment
Pub. L. 101–239Pub. L. 100–647section 7817 of Pub. L. 101–239section 1 of this titleAmendment by effective, except as otherwise provided, as if included in the provision of the Technical and Miscellaneous Revenue Act of 1988, , to which such amendment relates, see , set out as a note under .
Effective Date of 1988 Amendment
Pub. L. 100–647Pub. L. 99–514section 1019(a) of Pub. L. 100–647section 1 of this titleAmendment by effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, , to which such amendment relates, see , set out as a note under .
Effective Date of 1986 Amendment
section 632(c)(2) of Pub. L. 99–514section 633 of Pub. L. 99–514section 336 of this titleAmendment by applicable to taxable years beginning after , but only in cases where the return for the taxable year is filed pursuant to an S election made after , with exceptions and special and transitional rules, see , as amended, set out as an Effective Date note under .
section 701(e)(4)(K) of Pub. L. 99–514section 701(f) of Pub. L. 99–514section 55 of this titleAmendment by applicable to taxable years beginning after , with certain exceptions and qualifications, see , set out as an Effective Date note under .
Effective Date of 1984 Amendment
section 474(r)(26) of Pub. L. 98–369section 475(a) of Pub. L. 98–369section 21 of this titleAmendment by applicable to taxable years beginning after , and to carrybacks from such years, see , set out as a note under .
section 735(c)(16) of Pub. L. 98–369Pub. L. 97–424section 736 of Pub. L. 98–369section 4051 of this titleAmendment by effective, except as otherwise provided, as if included in the provisions of the Highway Revenue Act of 1982, title V of , to which such amendment relates, see , set out as a note under .
Effective Date
section 1372(e)(5) of this titlePub. L. 97–354section 1361 of this titleSection applicable to taxable years beginning after , except that in the case of a taxable year beginning during 1982, subsec. (f)(3) of this section and sections 1362(d)(3) and 1375 of this title shall apply, and as in effect on the day before , shall not apply, see section 6(a), (b)(3) of , set out as a note under .
Pub. L. 99–514Applicability of Certain Amendments by in Relation to Treaty Obligations of United States
section 701(e)(4)(K) of Pub. L. 99–514Pub. L. 100–647Pub. L. 99–514Pub. L. 100–647section 861 of this titleFor applicability of amendment by notwithstanding any treaty obligation of the United States in effect on , with provision that for such purposes any amendment by title I of be treated as if it had been included in the provision of to which such amendment relates, see section 1012(aa)(2), (4) of , set out as a note under .