Electing S Corporation Status

From TaxAlmanac, A Free Online Resource for Tax Professionals
Note: You are using this website at your own risk, subject to our Disclaimer and Website Use and Contribution Terms.

From TaxAlmanac

Jump to: navigation, search

Electing S Corporation Status

To elect to be an S corporation, a corporation must file Form 2553. The election permits the income of the S corporation to be taxed to the shareholders of the corporation rather than to the corporation itself, except as noted on page 1 of the Form 2553 instructions under “Taxes an S Corporation May Owe”.

Who may elect:

A corporation may elect to be an S Corporation only if it meets all of the following tests:

1. It is a domestic corporation.

2. It has no more than 100 shareholders. A husband and wife (and their estates) are treated as one shareholder for this requirement. All other persons are treated as separate shareholders.

3. Its only shareholders are individuals, estates, exempt organizations described in section 401(a) or 501(c)(3), or certain trusts described in section 1361(c)(2)(A).

4. It has no nonresident alien shareholders.

5. It has only one class of stock (disregarding differences in voting rights). Generally, a corporation is treated as having only one class of stock if all outstanding shares of the corporation’s stock confer identical rights to distribution and liquidation proceeds. See Regulations section 1.1361-1(l) for details.

6. It is not one of the following ineligible corporations:

a. A bank or thrift institution that uses the reserve method of accounting for bad debts under section 585,
b. An insurance company subject to tax under the rules of subchapter L of the Code,
c. A corporation that has elected to be treated as a possessions corporation under section 936, or
d. A domestic international sales corporation (DISC) or former DISC.

7. It has a permitted tax year as required by section 1378 or makes a section 444 election to have a tax year other than a permitted tax year. Section 1378 defines a permitted tax year as a tax year ending December 31, or any other tax year for which the corporation establishes a business purpose to the satisfaction of the IRS. See Part II of the Form 2553 instructions for details on requesting a fiscal tax year based on a business purpose or on making a section 444 election.

8. Each shareholder consents as explained on page 3 of the Form 2553 instructions.

See sections 1361, 1362, and 1378 for additional information on the above tests.

Personal tools