Entities - S Corporations - Eligibility and Election

Question 1

Who are eligible shareholders for an S corp?

Answer 1

• individuals - must be US Citizen or US resident
• bankruptcy estates
• single member LLC can elect to be taxes as an S corp
• testamentary trusts
• revocable trusts as part of an estate

Question 2

Who are ineligible shareholders

Answer 2

• nonresident aliens
• C corporations
• partnerships
• multiple member LLCs
• LLPs
• Foreign trusts

Question 3

What are the eligibility requirements for tax purposes

Answer 3

1) Domestic corporation
2) one class of stock (differences in stock voting rights allowed)
3) eligible shareholders must be individuals (no nonresident alien shareholders), estates, or certain types of trusts (not corporations or partnerships)
4) one-hundred shareholder limit

Question 4

What is the process / requirements for being made an S corp?

Answer 4

1) all shareholders must consent
2) election must be made either at the time during the year immediately preceding the year for which the election will be effective or on or before the 15th day of the third month of the election year (retroactively applied)

Question 5

How can S corporation status be terminated / revoked?

Answer 5

1) holders of a majority of the stock consent to voluntary termination
2) the corporation fails to meet any or all of the eligibility requirements
3) passive income exceeds 25% of gross receipts for 3 years in a row

Question 6

What tax year must an S corp adopt?

Answer 6

adopt a calendar year unless valid business purpose for a different tax year is established

Question 7

How long will an S corp have to wait to re-elect S corp status after terminating

Answer 7

5 years

Question 8

When does an unrealized built-in gain result?

Answer 8

results when a c corporation elects S corporation status and the FMV of corporate assets exceeds the adjusted basis of the corporate assets at the election date

Question 9

When is an S corporation exempt from a tax on built-in gains?

Answer 9

• the sale or transfer does not occur within 5 years of the five years of the first day of the first year that the S corporation election is made
• S corporation was never a C corporation
• S corporation can demonstrate that the distributed asset was acquired after the S election
• S corporation can demonstrate that the appreciation occured after the S election
• The net unrealized built-in gain has been completely recognized in prior tax years