S Corporations: The Widely-Held Shareholder Problem
When S Corporations first came onto the tax scene in 1958, they were limited to just 10 shareholders. This was later increased to 25, then 75, and finally 100 shareholders. And since the addition of the family attribution rules in 2004, which allow all members of a single family going back six generations to be treated as one shareholder toward the 100 shareholder limit, the shareholder lists for S Corporations across the country have ballooned.
Today, we routinely file S Corporation returns for financial institutions that include more than 250 K-1s. And each year as the shareholder base ages, those shareholder ranks continue to grow and grow as stock is passed down from one generation to the next.
This has left many widely-held S corporations facing a shareholder problem. With so many owners, it can become increasingly difficult and expensive to manage the S corporation eligibility rules and to prevent inadvertent terminations. It also becomes difficult to fully understand the tax situation faced by the institution’s individual owners many of which now own a tiny percentage of total equity.
Until now, the additional costs and headaches associated with being a widely-held S Corporation were worthwhile because of the significant tax savings associated with the pass-through structure compared to a traditional C corporation, but tax reform changes the equation.
With the much lower 21% C Corporation federal tax rate in effect beginning in 2018 and the elimination of the corporate alternative minimum tax, going back to a C Corporation may make sense in some cases. For widely-held institutions in particular, the added simplicity of a C Corporation may bring a welcome relief.
Every institution is unique and with the massive changes coming out of the new tax bill, we recommend that every institution once again take a strategic look at their tax structure.
CLA is here to help. Our financial institution team can educate management and the board on the new tax law, help you to estimate the impact of tax reform on your shareholder base, and assist with facilitating discussions with your shareholders to determine the best course of action for your institution.
Please contact us.
Amanda Garnett is a principal in the financial institutions practice of CliftonLarsonAllen (CLA) from Peoria, Illinois. She currently leads the firm’s Midwest financial institution tax team and serves institutions ranging in size from $15 million to $3.5 billion in total assets. In addition to tax compliance, Amanda assists clients in the areas of tax consulting, mergers and acquisitions, and regulatory reporting. She also routinely teaches courses for banking associations across the country.
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