An S corporation is not subject to Federal income tax (IRC §1363(a)), and each shareholder’s pro rata share of the corporation’s items of income, deduction, and credit is taken into account in determining the shareholder’s own income tax liability (IRC §1366(a)). Notwithstanding this “pass-through” treatment, and although an election for a corporation to be an S corporation requires the consent of all of its shareholders (IRC §1362(a)(2)), elections affecting the computation of items of income, gain, loss, deduction or credit derived from an S corporation are made by the corporation itself (IRC §1363(c)(1)), except in limited cases involving mining expenditures, foreign taxes, and expenditures that are preference items under the alternative minimum tax.

Setting aside those few exceptions, elections regarding methods of accounting, depreciation, use of the installment method, cancellation of indebtedness income, and other items derived from an S corporation must be made by the corporation; and elections required to be made (if they are to be made at all) by the corporation are applicable to all of its shareholders (Treas. Reg. §1.1363-1(c)(1)).

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