S corporation tax return extension only 5 months

Q: I have a regular corporation with a calendar year. It is my understanding that the due date for the 2016 return was April 15, 2017. I extended the return and assumed that meant I had until October 15. I was recently told that the extension period is only five months and the return was due 9/15. Every extension period I know is six months, so why would it be five months for a corporation? Did I miss the due date?

A: Yes you did. The law was changed for 2016 to make the due date for C corporation tax returns April 18, 2017. It had been March 15.

You are correct that extensions are normally 6 months. But the law that changed the due date for C corporation tax returns changed the extension period for tax years 2016 to 2025 from 6 months to 5 months. So the due date for returns 2016 to 2025 tax years for C corporations is September 15 of the following year. Beginning with the 2026 year, the extension period will run to October 15.

Q: We have a family business run as an S corporation. The corporation was started by my parents in 1993, and my siblings and I have owned the corporation since 2009. We owned 250 shares each until last summer, when two of my sisters sold 50 shares each back to the corporation. Our tax adviser has always told us to be careful to make distributions in the same ratio as stock ownership. This has always been faithfully followed. My question is how we consider the stock sales in making distributions in 2017. As president, I am in charge of deciding distributions. It seems to me that distributions made in December 2017 need to follow ownership in December 2017. One of my sisters says that her CPA says that is not true, and the distributions can be based on the average ownership during the year. This would shift distributions from the two largest owners to the two sisters who sold stock in the summer. I want to keep the family happy, so I am willing to do that but not at the risk of failing to qualify for the S corporation rule of proportionate distributions. What are we allowed to do in this situation?

A: The S corporation tax rules require that there be only one class of stock. Stock must have equal rights to distributions to avoid classification as a second class of stock.

In the days when the ownership of your corporation was 25 percent for each shareholder, the distributions would be made 25 percent to each shareholder, as you imply was always the corporate policy.

The summer stock redemption (meaning the corporation bought back the shares) creates two issues for the equal distribution rule.

First, the stock redemption that you describe will be treated as if the corporation made a distribution to the two sisters who redeemed their shares. Their ownership declined from 25 percent each to 22.22 percent each (200/900 shares each).

When share ownership is reduced from 25 percent to 22.2 percent by a stock redemption, the tax law says it is treated as a distribution to the shareholder rather than a sale of stock.

But the law also says that a distribution created by a stock redemption is ignored in determining whether distributions were made in proportion to stock ownership. So far, you have no problem.

Second, the law also says that distributions are allowed to consider the varying interests that occur in the current year or the immediate preceding year. This exception applies to your corporation.

Income is allocated to shareholders based on these varying interests. So, 2017 income will be allocated to reflect the average ownership during the year.

The law allows distributions to also follow the average ownership (reflecting the varying interests). Some corporations make distributions after determining income. So, 2017 income distributions may occur in 2018.

This is why the law allows you to consider the varying interests in the current year or the immediate preceding year. So, the 2017 change in ownership may affect 2017 or 2018 distributions.

I would suggest that 2017 distributions follow the income allocations for 2017, which also follow the varying interests.