AICPA asks Treasury and IRS to clarify S corporation issues arising from Tax Cuts and Jobs Act

The American Institute of CPAs (AICPA) has asked for immediate guidance from the U.S. Department of the Treasury and the Internal Revenue Service (IRS) on various S corporation items included in the Tax Cuts and Jobs Act (TCJA). 

“Taxpayers and practitioners need clarity on S corporation issues in order to comply with their 2018 tax obligations and to make informed decisions regarding cash-flow, entity structure, and tax planning issues,” Annette Nellen, CPA, CGMA, Esq., chair of the AICPA Tax Executive Committee chair, wrote in the letter.

Nellen identified certain items affecting S corporations that the AICPA believes the Treasury Department and the IRS should address in the coming months.  “Our letter includes both the AICPA priority issues and the recommendations to resolve these issues,” she stated. 

Specifically, Nellen recommended that Treasury and IRS provide the following items:

• Guidance on the application of the new laws on loss carryforwards.
  • Clarify how to coordinate various loss and deduction limitations with Internal Revenue Code section 199A qualified business income (QBI) carryover losses by applying the order as follows: section 163(j), 1366(d), section 465, section 469, section 461(l), and section 199A.
  • Clarify that the carryforward rule under section 163(j)(2) applies to S corporations despite section 1371(b)(2).
  • Clarify the definition of real property trades or businesses beyond section 469(c)(7)(C) for purposes of the disallowed business interest deduction under section 163(j).
  • Clarify the application of the section 461(l) limitation on net operating losses.
• Guidance on certain provisions relating to the post-termination transition period (PTTP) and the eligible terminated S corporation (ETSC) period under Internal Revenue Code section 1371(f).
  • Clarify how a corporation computes its accumulated adjustments account (AAA) upon re-electing S corporation status if the corporation was an ETSC and if the corporation was not an ETSC.
  • Clarify how the ETSC Period rules of section 1371(f) apply when a corporation has more than one PTTP.
  • Identify the shareholders eligible to receive distributions from a corporation’s AAA during the ETSC Period.
  • Clarify how distributions are allocated between the AAA and accumulated earnings and profits (AE&P) under section 1371(f).
  • Clarify how AAA is adjusted during the PTTP and the ETSC Period.
• Guidance on the treatment of deferred foreign income upon transition to participation exemption system of taxation (Internal Revenue Code section 965) for S corporation trust shareholders and what trust transactions are section 965 triggering events and how a transferee of S corporation stock held in trust might assume the liability for the section 965 transition tax.
  • Clarify that transition tax on deferred foreign income is not triggered by transfer to an irrevocable grantor trust or a revocable grantor trust.
  • Provide clarity regarding the assumption of the section 965 transition tax liability on the death of the grantor of a grantor type irrevocable trust that holds S corporation stock, as well as on the death of the grantor of a revocable trust making the section 645 election.
  • Provide clarity regarding a qualified subchapter S trust (QSST) and whether the trust or the beneficiary assumes the liability for the section 965 transition tax.
  • Provide clarity on whether a QSST conversion to an electing small business trust (ESBT) conversion, or an ESBT to QSST conversion, is a triggering event for purposes of the section 965 transition tax.
  • Provide clarity on whether the severance or division of a trust into separate shares is a triggering event for purposes of the section 965 transition tax.
  • Provide clarity on the material modifications in trusts or trust beneficiaries that Treasury and the IRS would treat as a triggering event for purposes of section 965(i)(2)(A)(iii).