Discussion:S-Corp Deemed Dividend of AE&P (Fed / CA Diff)
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Discussion Forum Index --> Advanced Tax Questions --> S-Corp Deemed Dividend of AE&P (Fed / CA Diff)
Discussion Forum Index --> Tax Questions --> S-Corp Deemed Dividend of AE&P (Fed / CA Diff)
| January 31, 2008 | |
| C-Corp w/ rental property just converted to S-Corp. We need to clear out AE&P in 1st year. However, there is a difference between the Fed AE&P and the CA AE&P. I would rather not issue a deemed dividend on the higher of the two. Can I make separate elections of Fed & CA with different amounts of Deemed Dividends? | |
| 31 January 2008 | |
| Any distributions made to the shareholders greater than the AE&P would not be considered a dividend | |
| 1 February 2008 | |
| A California S election can be terminated if the corporation's federal S election is terminated for excess passive income. Thus, termination is based on Federal numbers, not California numbers.
However, it does appear that the CA excess passive income tax is based on California numbers. California has a consent dividend procedure for California S corporations that have California E&P in excess of Federal E&P. I read the statute, but it is incomprehensible. See Sec. 23811(d) and 23811(e). Doesn't appear that California allows a separate deemed dividend election. | |
| February 1, 2008 | |
| Mike, Thank you for your reply. I agree. Perhaps this is a moot question because any distribution in excess of AE&P would just be a return of capital.
Riley, Thank you for the reference. The CA "consent dividend" cannot exceed the difference between the CA AE&P and the Fed AE&P (CA R&TC §23811(e)(2) & Form 100S Instructions, see text below). I am reading this as stating that CA will first recognize the Federal deemed dividend election and then, secondly, will allow an additional "consent" dividend to wipe out any extra CA AE&P that was not dealt with by the deemed dividend amount. Am I reading this correctly? CA R&TC §23811(e)(2): The amount of the consent dividend may not exceed the difference between the corporation's “subchapter C earnings and profits determined under subdivision (d) at the close of the taxable year with respect to which the determination is made and the corporation's subchapter C earnings and profits” for federal income tax purposes at the same date. Form 100S Instuctions, Line 29 — Excess net passive income tax: R&TC Section 23811(e) provides a deduction for C corporation earnings and profits attributable to California sources for any taxable year by the amount of a consent dividend paid after the close of the taxable year. The amount of the consent dividend is limited to the difference between the C corporation earnings and profits attributable to California sources and the C corporation earnings and profits for federal purposes. | |
| 1 February 2008 | |
| I believe so. It sounds like this only comes into play if the client is audited by the FTB. | |
| 1 February 2008 | |
| PVV, that's the way I've always understood the consent dividend provision. | |
