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How does an electing tax-option (S) corporation determine the situs of income?
The situs of income for an electing tax-option (S) corporation is determined as if the election under sec.
71.365(4m)(a), Wis. Stats., was not made. Therefore, an electing tax-option (S) corporation must determine income attributable to Wisconsin for each shareholder according to secs.
71.04 and
71.362, Wis. Stats., and use that method for determining the situs of income to the corporation.
Example:
Facts
- Shareholders A and B each own 50 percent of Tax-Option (S) Corporation
- Shareholder A was a Wisconsin resident for the entire year in 2023
- Shareholder B was a nonresident of Wisconsin for the entire year in 2023
- In 2023, 25 percent of Tax-Option (S) Corporation's income is earned in Wisconsin and 75 percent is earned in other states
- Tax-Option (S) Corporation has $100,000 of net ordinary business income for 2023
- Tax-Option (S) Corporation makes an election under sec.
71.365(4m)(a), Wis. Stats., to pay tax at the entity level for 2023
Computation of income attributable to Wisconsin
| | Shareholder A (resident) | Shareholder B (nonresident) |
|---|
| Portion of business income from the tax-option (S) corporation | $50,000 | $50,000 |
|---|
| Wisconsin apportionment % (situs of income) | 100% | 25% |
|---|
| Shareholder's Wisconsin income from the tax-option (S) corporation | $50,000 | $12,500 |
|---|
The electing tax-option (S) corporation's Wisconsin income is $62,500 ($50,000 + $12,500).
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What is the entity-level tax rate?
The net income reportable to Wisconsin is taxed at 7.9% as provided in sec.
71.365(4m)(a), Wis. Stats., and is computed on Schedule 5S-ET,
Entity-Level Tax Computation.
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Are long-term capital gains taxed at a different rate?
No, there is no separate tax rate for long-term capital gains.
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Can an electing tax-option (S) corporation claim the 30-percent or 60-percent long-term capital gain exclusion under sec. 71.05(6)(b)9. or 9m., Wis. Stats.?
For taxable years beginning on or after January 1, 2018, and before January 1, 2020, an electing tax-option (S) corporation may not claim the Wisconsin 30-percent or 60-percent long-term capital gain exclusion under sec.
71.05(6)(b)9. or
9m., Wis. Stats.
For taxable years beginning after December 31, 2019, an electing tax-option (S) corporation may claim the Wisconsin 30-percent or 60-percent long-term capital gain exclusion under sec. 71.05(6)(b)9. or 9m., Wis. Stats.
The modification under sec.
71.365(4m)(d)1.b., Wis. Stats., applies to taxable years beginning after December 31, 2019.
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Can an electing tax-option (S) corporation claim the capital gain exclusion for the sale of an investment in a qualified Wisconsin business?
No, an electing tax-option (S) corporation may not claim the capital gain exclusion for the sale of an investment in a qualified Wisconsin business under sec.
71.05(25), Wis. Stats.
Except for the modifications listed under sec.
71.365(4m)(d), Wis. Stats., the net income of an electing tax-option (S) corporation is computed under sec.
71.34(1k), Wis. Stats., which provides that net income or loss of a tax-option (S) corporation means net income or loss computed under the Internal Revenue Code (IRC), as defined under sec.
71.34(1g), Wis. Stats. The IRC does not provide an exclusion for the sale of an investment in a qualified Wisconsin business. Additionally, according to sec.
71.05(25)(a)1., Wis. Stats., only an individual may claim a capital gain exclusion from the sale of investment in a qualified Wisconsin business.
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Is an electing tax-option (S) corporation eligible to claim an exclusion of capital gains from the sale of an investment in a Wisconsin qualified opportunity fund?
Yes. An electing tax-option (S) corporation may claim the exclusion under sec.
71.34(1k)(p), Wis. Stats., for the sale of an investment in a Wisconsin qualified opportunity fund.
For more information about the federal and Wisconsin tax benefits of investing in a qualified opportunity fund, see the department's common questions about
Qualified Opportunity Zones.
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Can an electing tax-option (S) corporation register to be a qualified Wisconsin business?
Yes, an electing tax-option (S) corporation may register to be a qualified Wisconsin business if they otherwise qualify. See the department's common questions about
Registration of Qualified Wisconsin Businesses.
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Can an electing tax-option (S) corporation claim a deduction for charitable contributions?
No, an electing tax-option (S) corporation may not deduct charitable contributions and may not pass through charitable contributions to its shareholders.
Except for the modifications listed under sec.
71.365(4m)(d), Wis. Stats., the net income of an electing tax-option (S) corporation is computed under sec.
71.34(1k), Wis. Stats., which provides that net income or loss of a tax-option (S) corporation means net income or loss computed under the Internal Revenue Code (IRC), as defined under sec.
71.34(1g), Wis. Stats. According to sec.
1363(b)(2), IRC, taxable income of a tax-option (S) corporation is computed in the same manner as an individual as provided under the IRC, except that the deductions referred to in sec.
703(a)(2), IRC, shall not be allowed to the corporation. Section
703(a)(2)(C), IRC, provides that the deduction for charitable contributions provided in sec.
170, IRC, are not allowed.
According to sec.
71.34(1k)(b), Wis. Stats., charitable contributions are included in a tax-option (S) corporation’s net income, and therefore may not pass through to the shareholders.
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Is an electing tax-option (S) corporation subject to passive activity loss limitations?
Yes, an electing tax-option (S) corporation is subject to passive activity loss limitations as provided in sec.
469, IRC.
Except for the modifications listed under sec.
71.365(4m)(d), Wis. Stats., the net income of an electing tax-option (S) corporation is computed under sec.
71.34(1k), Wis. Stats. Section
71.34(1k), Wis. Stats. provides that net income or loss of a tax-option (S) corporation means net income or loss computed under the Internal Revenue Code (IRC), as defined under sec.
71.34(1g), Wis. Stats. According to sec.
1363(b), IRC, taxable income of a tax-option (S) corporation is computed in the same manner as an individual under the IRC.
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Is an electing tax-option (S) corporation subject to its shareholders' basis limitations when determining the amount of deductions or losses allowable in computation of net income of the tax-option (S) corporation?
Yes. According to sec.
71.365(1)(b), Wis. Stats., the adjusted basis of a shareholder in the stock and indebtedness of a tax-option (S) corporation that has made the entity-level tax election is determined as if the election was not made. According to sec.
71.365(4m)(b), Wis. Stats., it is the intent of the entity-level tax election that the tax-option (S) corporation shall pay tax on items that would otherwise be taxed if this election was not made. Since basis limitations affect the amount of income that would otherwise be taxed on the shareholder's return, such limitations also affect the amount of net income of the tax-option (S) corporation that is subject to tax when the corporation elects to pay tax at the entity level. See Example below.
Facts:
- Tax-Option (S) Corporation AB is 100% owned by Individual Z
- Tax-Option (S) Corporation AB is a calendar-year filer
- Tax-Option (S) Corporation AB makes the entity-level tax election under sec. 71.365(4m)(a), Wis. Stats.
- Individual shareholder Z is a full-year Wisconsin resident with the following information during the calendar year:
- Beginning stock basis in AB: $5,000
- Ordinary business income from AB: $40,000
- Cash distribution from AB: $50,000
- Section 179 expense from AB: $30,000
- No other items of income, gain, loss, or deduction
At the end of the calendar year, Individual Z has the following:
- $0 of Wisconsin basis in AB
- $5,000 of capital gains reportable to Wisconsin for excess distributions:
- $5,000 (beginning stock basis) + $40,000 (ordinary business income) = $45,000
- $50,000 (distributions from AB) - $45,000 = $5,000 of excess distributions
At the end of the calendar year, electing Tax-Option (S) Corporation AB has the following:
- $40,000 of ordinary business income reportable to Wisconsin
- $30,000 of section 179 expenses to carryforward. The $30,000 of section 179 expenses are suspended until such time that Tax-Option (S) Corporation AB may use them to offset income in a subsequent year in which the election is made.
Note: If the entity-level tax election had not been made, the $30,000 of section 179 expense would have been suspended for Individual Z due to a lack of basis in AB.
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How does an electing tax-option (S) corporation determine the characterization of passive income or loss?
The electing tax-option (S) corporation must determine the characterization of passive income or loss as if the election under sec.
71.365(4m)(a), Wis. Stats., was not made. Therefore, an electing tax-option (S) corporation must determine how each shareholder would characterize the income or loss as if the election was not made. Passive losses may not be passed through to the shareholders; however, suspended losses may be carried forward by the electing tax-option (S) corporation to be used to offset income in a subsequent year in which the election is made.
The electing tax-option (S) corporation must complete a pro forma federal Form 8582,
Passive Activity Loss Limitations, for Wisconsin in order to determine the allowable passive activity losses it may claim.
Except for the modifications listed under sec.
71.365(4m)(d), Wis. Stats., the net income of an electing tax-option (S) corporation is computed under sec.
71.34(1k), Wis. Stats. Section
71.34(1k), Wis. Stats. provides that net income or loss of a tax-option (S) corporation means net income or loss computed under the Internal Revenue Code (IRC), as defined under sec.
71.34(1g), Wis. Stats. According to sec.
1363(b), IRC, taxable income of a tax-option (S) corporation is computed in the same manner as an individual under the IRC. According to sec.
71.365(4m)(b), Wis. Stats., it is the intent that an electing tax-option (S) corporation must pay tax on items that would otherwise be taxed if the election was not made.
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What is the capital loss limitation for an electing tax-option (S) corporation?
For taxable years beginning on or after January 1, 2018, and before January 1, 2020, an electing tax-option (S) corporation is subject to a $3,000 capital loss limitation.
For taxable years beginning on or after January 1, 2020, and before January 1, 2023, an electing tax-option (S) corporation is subject to a $500 capital loss limitation.
For taxable years beginning on or after January 1, 2023, an electing tax-option (S) corporation is subject to a $3,000 capital loss limitation.
Except for the modifications listed under sec.
71.365(4m)(d), Wis. Stats., the net income of an electing tax-option (S) corporation is computed under sec.
71.34(1k), Wis. Stats. Section
71.34(1k), Wis. Stats. provides that net income or loss of a tax-option (S) corporation means net income or loss computed under the Internal Revenue Code (IRC), as defined under sec.
71.34(1g), Wis. Stats. According to sec.
1363(b), IRC, taxable income of a tax-option (S) corporation is computed in the same manner as an individual under the IRC.
The modification under sec.
71.365(4m)(d)1.a., Wis. Stats., limits the capital loss deduction to $500 for taxable years beginning after December 31, 2019, and before January 1, 2023. The modification under sec.
71.365(4m)(d)1.am., Wis. Stats., limits the capital loss deduction to $3,000 for taxable years beginning after December 31, 2022.
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Is an electing tax-option (S) corporation subject to federal section 179 expense limitations?
Yes, an electing tax-option (S) corporation is subject to federal section 179 expense limitations, as provided in sec.
71.34(1k), Wis. Stats. The limit is applied at the entity level.
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Can an electing tax-option (S) corporation claim the federal special depreciation allowance, bonus depreciation, under sec. 168(k), Internal Revenue Code (IRC)?
No, an electing tax-option (S) corporation may not claim the federal special depreciation allowance provided in sec.
168(k), IRC.
Except for the modifications listed under sec.
71.365(4m)(d), Wis. Stats., the net income of an electing tax-option (S) corporation is computed under sec.
71.34(1k), Wis. Stats. Section
71.34(1k), Wis. Stats., provides that net income or loss of a tax-option (S) corporation means net income or loss computed under the Internal Revenue Code (IRC), as defined under secs.
71.34(1g) and
71.98, Wis. Stats. These sections exclude the federal special depreciation allowance provided in sec. 168(k), IRC.
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Can an electing tax-option (S) corporation carry forward suspended capital and passive activity losses?
Yes, an electing tax-option (S) corporation may carry forward suspended capital and passive activity losses. When an election is made, such losses may not pass through to shareholders; they are suspended until such time that the tax-option (S) corporation may use them to offset income in a subsequent year in which the election is made.
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Can an electing tax-option (S) corporation carry back or carry forward net business losses?
No, according to sec.
71.365(4m)(d)3., Wis. Stats., an electing tax-option (S) corporation may not claim net operating or business losses under secs.
71.05(8) and
71.26(4), Wis. Stats.
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Can an electing tax-option (S) corporation pass through net business losses to its shareholders?
No, shareholders of an electing tax-option (S) corporation may not include in their Wisconsin adjusted gross income their proportionate share of all items of income, gain, loss, or deduction of the tax-option (S) corporation, according to sec.
71.365(4m)(b), Wis. Stats.
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Can an electing tax-option (S) corporation claim credits to offset taxable income at the entity level?
According to sec.
71.365(4m)(d)2., Wis. Stats., an electing tax-option (S) corporation may only claim a credit for other state taxes paid under sec.
71.07(7)(b)3., Wis. Stats.
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Can an electing tax-option (S) corporation pass through credits to its shareholders?
Yes, an electing tax-option (S) corporation may pass through credits to its shareholders, except for the credit for taxes paid to other states by the tax-option (S) corporation as provided in sec.
71.07(7)(b)2., Wis. Stats.
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How is the manufacturing and agriculture (M&A) credit included in Wisconsin income if a tax-option (S) corporation makes an election to pay tax at the entity level in the year the M&A credit is computed and does not make the election to pay tax at the entity level in the following year?
The M&A credit must be added to the tax-option (S) corporation's income for the year following the year in which the credit was computed as provided in sec.
71.26(2)(a)11., Wis. Stats., regardless of whether the tax-option (S) corporation makes the election to pay tax at the entity level.
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How does an electing tax-option (S) corporation compute the credit for taxes paid to another state?
An electing tax-option (S) corporation must use Schedule ET-OS to compute the allowable credit for taxes paid to another state. See Schedule ET-OS instructions for additional information.
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Can an electing tax-option (S) corporation claim a credit for taxes paid to another state if the taxes paid to the other state are paid by a shareholder on an individual income tax return?
No, in order for an electing tax-option (S) corporation to receive credit for taxes paid to another state, the tax-option (S) corporation must pay the taxes owed to the other state on a corporate income or franchise tax return, or pay tax to the other state on a composite return filed on behalf of its shareholders as provided in sec.
71.07(7)(b)3., Wis. Stats.
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Is withholding tax paid by an electing tax-option (S) corporation in another state (e.g., Illinois) on behalf of its members considered a "composite return" for purposes of the Wisconsin entity-level credit for taxes paid to another state?
A tax-option (S) corporation may claim a credit for withholding taxes paid to another state on behalf of a Wisconsin resident shareholder as provided in sec.
71.07(7)(b)3., Wis. Stats., if all of the following apply:
- The law in the other state provides that the Wisconsin resident is not required to file an individual income tax return because the individual's net income tax liability is considered paid in full as a result of the withholding tax paid by the entity on the Wisconsin shareholder's income attributable to the other state.
- The Wisconsin resident does not file an individual income tax return in the other state.
Caution: Although the individual is not required to file an Illinois income tax return, the individual may file such return with Illinois.
- The income taxed by the other state is attributable to amounts that would be reportable to Wisconsin if the entity-level tax election was not made.
- The tax-option (S) corporation pays the liability shown on the other state's withholding tax return. Amounts paid to the other state are considered paid to that other state only in the year in which the withholding tax return for that state was required to be filed.
- The tax-option (S) corporation includes a copy of the other state's withholding tax return with its Wisconsin Form 5S.
- The credit is claimed within four years of the unextended due date of the entity's return.
For example, Illinois law provides that a nonresident of Illinois who has had Illinois income tax withheld by a tax-option (S) corporation is not required to file an Illinois individual income tax return if the nonresident's income tax liability is paid in full after taking into account the withholding.
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Can a tax-option (S) corporation making the election to pay tax at the entity level exclude income at the entity level if the income is attributable to a tax-exempt shareholder (e.g., employee stock ownership plan)?
No, according to sec.
71.365(4m)(d), Wis. Stats., net income of an electing tax-option (S) corporation is computed under sec.
71.34(1k), Wis. Stats., which provides that net income or loss of a tax-option (S) corporation means net income or loss computed under the Internal Revenue Code (IRC), as defined under sec.
71.34(1g), Wis. Stats. According to sec.
1363(b), IRC, taxable income of a tax-option (S) corporation is computed in the same manner as an individual as provided under the IRC.
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For Wisconsin purposes, how will the tax-option (S) corporation entity-level tax election affect the deductible amount of a shareholder's interest expense related to a debt-financed acquisition of stock of the electing tax-option (S) corporation?
The interest paid by the shareholder is an expense incurred by the shareholder; it is not an expense of the tax-option (S) corporation. The deductibility of the interest expense on the shareholder's Wisconsin income tax return is determined under the Internal Revenue Code (IRC) in effect for Wisconsin. The shareholder may deduct the interest expense to the extent allowable under Internal Revenue Service
Treas. Reg. sec. 1.163-8T and secs.
163(d) and
469, IRC, in effect for Wisconsin, regardless of whether the tax-option (S) corporation makes an election under sec.
71.365(4m)(a), Wis. Stats., to pay tax at the entity level.
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Where does an electing tax-option (S) corporation report taxable federal, state, and municipal government interest that would have been reported on line 1 of Form 5S if the entity-level tax election was not made?
Taxable federal, state, and municipal government interest is reported on line 1 of Form 5S regardless of whether the tax-option (S) corporation makes an election under sec.
71.365(4m)(a), Wis. Stats., to pay tax at the entity level. The interest is not included as part of the entity level tax computation on Schedule 5S-ET.
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Can an electing tax-option (S) corporation claim a deduction for health insurance premiums paid on behalf of a greater than 2-percent shareholder?
An electing tax-option (S) corporation is allowed to deduct health insurance premiums paid on behalf of a greater than 2-percent shareholder as wage expense reportable on the shareholder's Form W-2. The electing tax-option (S) corporation may not also claim the self-employed health insurance deduction allowed on the shareholder's tax return.
Note: The shareholder may still claim their self-employed health insurance deduction as if the election to pay tax at the entity level was not made.
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If a shareholder of an electing tax-option (S) corporation had a suspended loss from a prior year due to basis limitations, can the electing tax-option (S) corporation use the shareholder's suspended loss to reduce its Wisconsin taxable income in the current year?
No, an electing tax-option (S) corporation may not use a shareholder's suspended loss from prior years when computing Wisconsin taxable income. Suspended loss due to a basis limitation occurs when a shareholder is disallowed business loss passed-through from a tax-option (S) corporation because the shareholder does not have enough tax basis in the entity.
Note: According to sec. 71.365(1)(b), Wis. Stats., a shareholder's adjusted basis of the shareholder's stock in an electing tax-option (S) corporation is determined as if the election was not made. Therefore, a shareholder with prior year suspended losses due to basis limitations may be able to deduct a portion of the suspended losses in a year the shareholder's basis in the stock of the tax-option (S) corporation increases, regardless if the tax-option (S) corporation makes the entity-level tax election.