[Code of Federal Regulations]
[Title 26, Volume 11]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.1363-1]

[Page 735-736]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.1363-1  Effect of election on corporation.

    (a) Exemption of corporation from income tax--(1) In general. Except 
as provided in this paragraph (a), a small business corporation that 
makes a valid election under section 1362(a) is exempt from the taxes 
imposed by chapter 1 of the Internal Revenue Code with respect to 
taxable years of the corporation for which the election is in effect.

[[Page 736]]

    (2) Corporate level taxes. An S corporation is not exempt from the 
tax imposed by section 1374 (relating to the tax imposed on certain 
built-in gains), or section 1375 (relating to the tax on excess passive 
investment income). See also section 1363(d) (relating to the recapture 
of LIFO benefits) for the rules regarding the payment by an S 
corporation of LIFO recapture amounts.
    (b) Computation of corporate taxable income. The taxable income of 
an S corporation is computed as described in section 1363(b).
    (c) Elections of the S corporation--(1) In general. Any elections 
(other than those described in paragraph (c)(2) of this section) 
affecting the computation of items derived from an S corporation are 
made by the corporation. For example, elections of methods of 
accounting, of computing depreciation, of treating soil and water 
conservation expenditures, and the option to deduct as expenses 
intangible drilling and development costs, are made by the corporation 
and not by the shareholders separately. All corporate elections are 
applicable to all shareholders.
    (2) Exceptions. (i) Each shareholder's pro rata share of expenses 
described in section 617 paid or accrued by the S corporation is treated 
according to the shareholder's method of treating those expenses, 
notwithstanding the treatment of the expenses by the corporation.
    (ii) Each shareholder may elect to amortize that shareholder's pro 
rata share of any qualified expenditure described in section 59(e) paid 
or accrued by the S corporation.
    (iii) Each shareholder's pro rata share of taxes described in 
section 901 paid or accrued by the S corporation to foreign countries or 
possessions of the United States (according to its method of treating 
those taxes) is treated according to the shareholder's method of 
treating those taxes, and each shareholder may elect to use the total 
amount either as a credit against tax or as a deduction from income.
    (d) Effective date. This section applies to taxable years of 
corporations beginning after December 31, 1992. For taxable years to 
which this section does not apply, corporations and shareholders subject 
to the provisions of section 1363 must take reasonable return positions 
taking into consideration the statute, its legislative history and these 
regulations. See Notice 92-56, 1992-49 I.R.B. (see Sec. 
601.601(d)(2)(ii)(b) of this chapter), for additional guidance regarding 
reasonable return positions for taxable years to which this section does 
not apply.

[T.D. 8449, 57 FR 55456, Nov. 25, 1992]