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Wisconsin Tax Treatment of Tax-Option (S) Corporations and Their Shareholders

amortization existed before January 1, 1987. These

and P.L. 105-34, generally won’t apply for Wisconsin

purposes unless retroactively adopted by the Wisconsin

differences are summarized in the instructions for

Legislature.

preparing the tax-option (S) corporation franchise or

income tax return, Form 5S.

d. Adjustments required as a result of making different

elections for federal and Wisconsin purposes.

b. Differences between the federal and Wisconsin

bases of assets disposed of during the taxable year.

Example 1: The federal work opportunity tax credit and

federal research credit are allowed instead of deductions

Example: During the current taxable year, a corporation

for wages and research expenses, respectively. For

sold the following assets, which had been held more than

Wisconsin purposes, the corporation may elect not to

one year:

reduce wages and research expenses by the amount of

these credits.

Selling

Wisconsin

Federal

Price

Basis

Example 2: For federal purposes, shareholders may claim

Building

$ 200,000

$ 150,000

$ 120,000

either a credit or a deduction for foreign income taxes paid

Machinery

15,000

5,000

17,500

by a tax-option (S) corporation. For Wisconsin purposes,

Equipment

1,000

1,500

500

the foreign taxes may be deductible as provided under the

Internal Revenue Code.

The gains (losses) realized on these transactions are:

e. An addition (on Schedule 5K, line 1) for manufac-

Wisconsin

Federal

turer’s sales tax credit claimed on Form 5S, line 5,

Gain (Loss)

but not more than the tax on Form 5S, line 4.

Building

$ 50,000

$ 80,000

Machinery

10,000

(2,500 )

An addition (on Schedule 5K, line 1) for develop-

Equipment

(500 )

500

ment zones credits computed on Wisconsin Sched-

Total

$ 59,500

$ 78,000

ule DC, lines 11, 19, 27, 59, 65, 71, and 77, to the

extent that the amounts aren’t included in federal

For federal purposes, the $500 gain on the sale of the

taxable income.

equipment is determined to be depreciation recapture,

which is treated as ordinary gain and included in the

g. An addition (generally on Schedule 5K, line 1) for

corporation’s ordinary income or loss on Form 5S,

taxes imposed by Wisconsin, any other state, and the

Schedule 5K, line l, column b.

District of Columbia that are value-added taxes,

single business taxes, or taxes on or measured by all

The corporation must recompute a federal Form 4797,

or a portion of net income, gross income, gross

substituting the Wisconsin depreciation allowed or allow-

receipts, or capital stock and that were deducted in

able and the Wisconsin basis of the assets for the federal

amounts.

computing federal income.

For Wisconsin purposes, $5,000 of the gain on the sale of

Note: You must also show nondeductible taxes as an

the machinery is determined to be depreciation recapture,

addition on Schedule 5K, line 18.

which is treated as ordinary gain.

Example 1: The Internal Revenue Service has determined

The corporation enters $4,500 ($5,000 Wisconsin ordi-

that for federal purposes Wisconsin’s temporary recycling

nary gain minus $500 federal ordinary gain) on Schedule

surcharge is a state tax within the meaning of IRC section

5K, line 1, column c. The corporation makes the following

164(a). Therefore, it may be deductible as provided under

entries on Schedule 5K, line 5: $77,500 in column b,

section 164. The amount deductible for federal purposes

$(23,000) in column c, and $54,500 in column d.

must be added back to federal income to arrive at Wiscon-

sin income.

c. Adjustments required because the federal amount

was computed using a provision of the Internal

Example 2: A tax-option (S) corporation does business in

Revenue Code that doesn’t apply for Wisconsin

Wisconsin and in another state that doesn’t recognize its

purposes.

S status. The corporation pays $5,000 of franchise tax to

the other state, which it deducts in computing federal

ordinary income as shown on Schedule 5K, line 1, column

Example: Federal law changes enacted after Decem-

b. The $5,000 must be shown as an addition to income on

ber 31, 1996, other than the changes made by P.L. 105-33

Schedule 5K, line 1, column c, and as an increase in the

Publication 102 - Wisconsin Tax Treatment Of Tax-Option (S) Corporations And Their Shareholders Page 11

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