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S Corporations are Entity of Choice; 68% of S Corps Misreport

Posted on by Caleb Newquist

A recent IRS study shows that S corporation return filings (Form 1120S) increased dramatically and continue to be the most prevalent type of corporation filing. For Tax Year 2006, almost 2/3rds of all corporations filed a Form 1120S. The total number of returns filed by S corporations for Tax Year 2006 increased to nearly 3.9 million, from nearly 3.2 million reported in Tax Year 2002 and 722,444 in 1985. In 2006, there were 6.7 million S corporation shareholders. S corporations became the most common corporate entity type in 1997.


According to IRS data, about 68% of S corporation returns filed for tax years 2003 and 2004 (the years data were available) misreported at least one item. About 80% of the time, misreporting provided a tax advantage to the corporation and/or shareholder. The most frequent errors involved deducting ineligible expenses. Even though a majority of S corporations used paid preparers, 71% of those that did were noncompliant.

Reasonable compensation still an issue for S corporations – The GAO report also focused attention on the loophole that allows shareholders to reduce payroll taxes by reducing wage compensation. The IRS admitted that their efforts to enforce the adequate compensation rules for S corporation shareholders have been limited. For fiscal years 2006 through 2008, the IRS examined less than half of one percent of S corporations who filed.

Misreporting of shareholder basis is also a common problem, permitting shareholders to claim excess losses averaging $21,600 per taxpayer based on IRS audits for the period 2006 to 2008.

(Note: The above information was excerpted from Vern Hoven’s manual used in CPE Link’s Federal Tax Update: Part 4 webcast.) Webcasts are scheduled November-January. In Part 4, you’ll get an update on all corporate changes, partnership changes, and IRS audit issues.

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You Can Blame the Tax Code for Expensive Baseball Tickets

Since it’s opening day for baseball, there are probably a few of you (non-tax accountants) that are at the ballpark enjoying sun, overpriced beers and, if you’re lucky, some complimentary tickets on behalf of your firm.

If you happen to be shelling out your own hard-earned money however, you’re no doubt aware that price of your tickets continue to go up season after season. Throw in $9 beers and Brother Jimmy’s BBQ and you’ll spend a small grip just to enjoy a day of sport and no work.

What’s the cause of the skyrocketing cost of attending a baseball game, you ask? The tax code of course!


That’s according to an op-ed by two professors, Duke law professor Richard Schmalbeck and Rutgers business professor Jay Soled, in today’s Times.

There are many reasons for the price explosion, but a critical factor has been the ability of businesses to write off tickets as entertainment expenses — essentially a huge, and wholly unnecessary, government subsidy.

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On the supply side, the large number of businesses bidding for expensive seats has driven the expansion of luxury skyboxes and a reduction in overall seats in new ballparks.

The authors note that baseball was, until the 1970s, a “populist sport” and fans of all economic classes could attend games for a reasonable cost. Those days are long gone and the professors blame the ability of corporations to deduct business-entertainment expenses as the culprit. They state that you not need look further than the opening of the new Yankee Stadium that has “3,000 fewer seats than its 1923 predecessor but almost three times as many skybox suites.”

The professors advocate a limit on deductions for on luxury tickets to a low fixed amount (e.g. $50). They cite the outright elimination as “unrealistic” but we can’t recall at time when “realistic” and “Congress” collided in a sentence.

We agree with our esteemed colleague at ATL that if you really want to stick it to the companies who take advantage of tax code’s generous provisions, just make skybox tickets non-deductible altogether.

As the authors note, Corporate America has a love affair with sports-related perks and we’d guess that eliminating the deduction would not stop them from buying luxury tickets. The client relation types in your firms know that there is an intangible value to wooing potential clients in some comfortable confines as opposed to cramped seating in the stands with the commoners.

Throw Out Skybox Tax Subsidies [NYT via ATL]