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In episode three of “Tax Stuff You Should Know,” hosts Bob Pluth and Gene Magidenko delve into the intricate world of S corporations, tracing their historical development, examining the qualifications for electing S status, and identifying the missteps that can inadvertently revoke that designation.
Bob and Gene unpack the consequences of the termination of an S election, pinpoint frequent triggers of terminations, and suggest practical strategies to prevent these issues. Their conversation underscores the need for careful planning to maintain S corporation status and outlines solutions for inadvertent terminations and other S corporation maladies.
Key Takeaways
- There are complex rules governing the eligibility of S corporations, including the types of shareholders (individuals, estates, certain trusts and tax-exempt organizations qualify, but nonresident noncitizen individuals, partnerships, corporations, and ineligible trusts do not).
- S corporation status terminates if the election is revoked or the corporation ceases to meet all eligibility requirements at any time.
- Termination often results from ineligible shareholders or failure to maintain a single class of stock.
- An inadvertent termination can result in unfavorable tax consequences, which are compounded by the fact that the termination often is not discovered until years later.
- There are ways to mitigate the risk of an inadvertent termination, such as keeping up with the maintenance of corporate records, putting into place a shareholder agreement with transfer restrictions, and requiring S corporation shares to be certificated.
- Relief for certain inadvertent terminations and other S corporation issues may be available through revenue procedures, but in some cases a private letter ruling from the Internal Revenue Service (IRS) is needed to resolve the problem.
Please reference the show notes for supplemental information.
