What are the eligibility requirements that a corporation must meet in order to qualify under Subchapter S?
-Be a domestic corporation;
- Have no more than 100 shareholders;
- The S Corporation must include only eligible shareholders in the election;
- The entity must have only one class of stock;
- The business must not be an ineligible corporation.
What limits are placed on the selection of a tax year of an S corporation? How do these limits differ from those applicable to C corporations and partnerships?
An S Corp. must use a calendar year as their taxable year, unless certain circumstances are approved for the S Corp. by the IRS, which may allow the S Corp. to use a tax year other than the calendar year. Using a calendar year can be a challenge for businesses that changed entity type to an S Corp, and are used to using a fiscal year.
This is also contrasted from a C ...view middle of the document...
The reason for this is because the S Corp. election does not dispose of the assets purchased when a C Corp that lead to investment credit recapture. The asset purchase is treated as nothing more than a change that has taken place in the form of conducting business, per the Internal Revenue Code (IRC). Also, if the S Corporation is ever terminated, that also will not create any grounds for an investment credit recapture.
Several individuals form Lang Corporation on May 1, 2011. The corporation begins acquiring assets on June 1, 2011, and begins business on August 1, 2011. What is the latest date that Lang can file Form 2553 requesting S corporation status?
A corporation must file their 2553 to request S Corporation status no more than two months and 15 days after the beginning of the tax year that the election is to take effect, or at any time during the tax year preceding the tax year it is to take effect.
The individuals formed the business on May 1st - they need to file by July 15th, at the latest, which would be two months and 15 days after forming the corporation. The asset purchases don't matter, and the fact that they began business in August doesn't matter. The day they formed the corporation would be the deciding factor. Under no circumstances can the corp. file for S corp. status before May 1, 2010 (which they may do if they decide to file paperwork before opening the business). The election would not be valid.
A shareholder purchases 30 percent of the stock of an S corporation two-thirds of the way through the year for $20,000. The S corporation incurs an operating loss of $300,000 for the year. What is the amount that the shareholder may deduct on his personal income tax return, assuming the at-risk and passive activity rules do not apply?
The shareholder will receive a K1 that reports their loss of $30,082.
$300,000 * 122/365 * 30%
If at-risk and passive activity rules did apply (and they actually will), the shareholder will only be able to deduct $20,000 on his or her tax return, and the balance will be carried forward.