A C Corporation requires Form 1120 to be completed for tax purposes, while an S Corporation requires Form 1120S. Both forms contain Schedules M-1, M-2 and M-3. Schedule M-1 is used to reconcile book income to taxable income. Schedule M-2 is for analysis of accumulated adjustments. Schedule M-3 must be used, instead of Schedule M-1, if a corporation has total assets of $10 million or more. (Department of the Treasury, 2015)
In order to reconcile for the ABC Company as a C Corporation, using Schedule M-1, we start with net income per books, add the amount of income tax owed as well as expenses (ex. the casualty loss; the charitable contribution), then subtract tax exempt interest (dividend income) and other deductions in order to arrive at taxable income. (Department of the Treasury, 2015)
In order to reconcile for the ABC Company as an S Corporation, using Schedule M-1, we start with net income per books, add income and expenses from Schedule K, then subtract tax exempt interest and other deductions from Schedule K in order to arrive at taxable income. (Department of the Treasury, 2015)
I recommend that the ABC Company remains a C Corporation, and does not apply for S Corporation status at the end of the year. Historically, ABC Company has experienced a loss every other year. Year 6 and year 8 had net short-term capital losses. If the trend continues, it can be expected that ABC Company will experience a net loss for year 10. Since net operating losses cannot be carried over year to year in an S Corporation, the company would only be able to carry forward this loss if it remains a C Corporation. Additionally, there are rules in place by the IRS to detect and prevent tax avoidance.
If ABC Company becomes an S Corporation, it may be required to pay certain taxes because it was previously a C Corporation. The new S Corporation, according to Hoffman,