A client is trying to decide how to reorganize a subsidiary

A client is trying to decide how to reorganize a subsidiary corporation in a consolidated group and has come to you for advice. The subsidiary currently has a net operating loss, but your client would like to sell it in the near future. For an optimal tax outcome, should the subsidiary corporation be reorganized as a C corporation or an S corporation?

Your analysis should be 4-5 pages

Solution

S corporation vs. C corporation: The similarities

The C corporation is the standard corporation, while the S corporation has elected a special tax status with the IRS. It gets its name because it is defined in Subchapter S of the Internal Revenue Code. To elect S corporation status when forming a corporation, Form 2553 must be filed with the IRS and all S corporation guidelines met. But C corporations and S corporations share many qualities:

S corporation vs. C corporation: The differences

Despite their many similarities, S corporations and C corporations also have distinct differences.

S corporation (S corp) election

To become an S corporation, you must file Form 2553 with the IRS. The IRS instructions—which can be a bit tough to follow—require that an election is considered effective in the current tax year only if the Form 2553 is completed and filed:

Generally, an election made after the 15th day of the 3rd month but before the end of the tax year is effective for the next tax year (unless you can show failure to file on time was due to reasonable cause).

Keep in mind that some states also require you to file a state-level S corporation election after incorporating your business.