STU10 Flashcards
How is an election to be taxed under Subchapter S is made?
The election to be taxed under Subchapter S is made on Form 2553 (election by small business corporation to tax corporate income directly to shareholders). This form may be filed during the previous tax year or within 2 1/2 months of the beginning of the current tax year to qualify for S corporation status for the current tax year [Sec. 1362(b)]. In the case of a calendar-year corporation, this would mean filing before March 15 of the current year. Under Sec. 1362(b)(5), the IRS may treat a late-filed election as timely filed if reasonable cause existed (for tax years beginning after 12/31/82). Each person who is a shareholder at the time of election must consent by signing Form 2553. In addition, each person who was a shareholder at any time during the part of the tax year before the election is made must also consent. If any former shareholders do not consent, the election is considered made for the following year.
How are corporate organizational costs deducted?
The computation of an S corporation’s nonseparately stated (ordinary) income or loss is governed by Sec. 1363(b). That section states that Sec. 248 applies to S corporations. Sec. 248 allows corporate organizational costs to be amortized over a period of not less than 180 months. Up to $5,000 of organizational expenses may be deducted in the taxable year in which the business begins. The $5,000 is reduced by the amount by which the cumulative costs of the organizational expenditures exceed $50,000. After incurring $55,000 of organizational expenses, no costs are deductible, and all costs are amortized over 180 months. The $5,000 deduction may be taken for expenditures but all of the expenditures incurred during the taxable year are considered when computing the phase-out.
What is the maximum amount of passive investment income allowed to earn and still qualify as an S corporation?
There is no limit on the amount of passive investment income that a corporation can earn and still qualify as an S corporation. S corporation status is terminated if the corporation has had passive investment income in excess of 25% of gross receipts for 3 consecutive taxable years and has had Subchapter C earnings and profits at the end of each of those taxable years. Subchapter C earnings and profits are those accumulated during a taxable year for which a Subchapter S election was not in effect.
