Unit 5: S Corporations

Question 1

To become an S corporation, a corporation must file what form and by when.

Answer 1

2552 “Election by a Small Business Corporation”

• The filing must be made no later than the 15th day of the 3rd month after the start of its tax year for the election to be effective at the beginning of the year

Question 2

If the S election is made during the corporation’s tax year for which it first takes effect, each shareholder who holds stock at any time during the part of that year before the election is made must:

Answer 2

Also, consent to the election. This is true even if the person may have sold or transferred their stock before the election is made.

Question 3

The IRS will generally accept a late S-election if the following requirements are met:

Answer 3

• The entity intended to be classified as an S corporation, is an eligible entity, and failed to qualify as an S corporation solely because the election was not timely
• The entity has reasonable cause for its failure to make the election timely
• The entity and all shareholders reported their income consistent with an S corporation election in effect for the year the election should have been made and all subsequent years
  -Less than three years and 75 days have passe4d since the effective date of the election (unless certain additional conditions are met)

Question 4

The following entities cannot elect S corporation status:

Answer 4

• A bank or thrift institution that uses the reserve method of accounting for bad debts
• An insurance company
• A domestic international sales corporation (DISC)
• Any foreign entity

Question 5

An S corporation must use one of the following accounting periods:

Answer 5

1. A calendar year
2. A natural business year (a 12-month fiscal year ending at a low point of business activities)
3. An ownership tax year (The tax year that coincides with greater than 50% ownership of the corporation)
4. A fiscal year elected and approved by the IRS under section 444
5. A 52-53 week year that ends with reference to any year listed above

Question 6

Normally basis is adjusted annually, on the last day of the S corporation year, in the following order:

Answer 6

• Increased for income items and excess depletion
• Decreased for distributions
• Decreased for nondeductible, noncapital expenses
• Decreased for items of loss and deductions