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Bulletin #19

Taxpayers' Information Service
Subchapter S

This Bulletin is cited in Ruling 91-10 and
Obsoleted in part by AN 94-1

The Subchapter S Revision Act of 1982 (Public Law 97-354) significantly affects S Corporations which are subject to the Connecticut Corporation Business Tax and S Corporation shareholders who are subject to the Connecticut Capital Gains, Dividends and Interest Taxes.

S Corporations will continue to be subject to the Corporation Business Tax (imposed by section 12-214 of the Connecticut General Statutes) if they carry on, or have the right to carry on business within the state.

The measure of the tax is the S Corporation's ordinary income or loss (Form 1120S, line 24), which is the nonseparately computed income or loss as defined in section 1366(a) (2) of the Internal Revenue Code, adjusted by:

1. Adding:

(A) The Federally exempted interest received or accrued on state and municipal governmental obligations,

(B) The federally allowable deduction for the Corporation Business Tax paid or accrued.

2. Subtracting items of income treated, for federal S Corporation tax purposes, as nonqualifying dividends, to the extent not otherwise deducted from gross income, and adding federally allowable deductions for expenses related to such dividends.

Form 208S is the Corporation Business Tax Return which will be filed by an S Corporation.

An S Corporation will now be treated as a conduit for the distribution of income and an S Corporation shareholder who is a Connecticut resident (as defined in section 12-505 of the Connecticut General Statutes) is subject to the Capital Gains, Dividends and Interest Taxes on the pro rata share of items of income which are treated, for federal tax purposes, as capital gain income, dividend income or interest income, respectively.

The character of any item of income which is included in a shareholder's pro rate share will be that character which it had when realized by the corporation.

Certain distributions to shareholders by an S Corporation with accumulated earnings and profits will be treated, for federal tax purposes, as capital gain income or dividend income which is received or accrued by the shareholders. (See section 1368(b) (2) and (c) (2) of the Internal Revenue Code.) The same treatment will be given to such distributions for Capital Gains, Dividends and Interest Tax purposes.

An S Corporation shareholder who is a Connecticut resident will not be subject to the Dividends and Interest Taxes unless the adjusted gross income, for federal tax purposes, of the shareholder is $54,000 or greater.