For the purposes of federal taxation, S companies are businesses that choose to pass through to their shareholders corporate income, losses, deductions, and credits. Due to this, S corporations can avoid paying two taxes on their income. To elect or maintain S company status, S corporations must adhere to particular criteria, and failure to do so may result in the termination of the S corporation election.
Failure to meet the eligibility standards is one situation that could result in the automatic termination of the S corporation election. For instance, the S corporation election will be cancelled immediately if the S company has more than 100 shareholders or if there is a non-qualifying shareholder, such as a corporation or non-resident alien. In these situations, the corporation will be taxed twice and treated as a C corporation.
The election being voluntarily revoked is another circumstance that could result in its termination. An S corporation must file Form 1120S with the IRS and state tax agencies and follow the relevant state law revocation processes if it intends to revoke its S corporation election. The corporation cannot choose S corporation status again for five years without IRS approval after the election has been withdrawn.
Selling your shares or transferring them to another shareholder will allow you to leave a S corporation if you are a shareholder and desire to do so. In addition, you have the option of voluntary share redemption or corporate share redemption. However, you should be aware that the redemption may be regarded as a taxable distribution to the shareholder if the corporation has accrued earnings and profits or assets that exceed the basis of the shareholder’s stock.
One might also inquire as to whether a S corporation election can be retroactively made. No, is the response. By the fifteenth day of the third month of the corporation’s tax year, the S corporation election must be made. The election has to be made by March 15th, for instance, if the organization has a calendar year-end.
Finally, with regard to the submission of Forms 8832 and 2553, a corporation must submit Form 8832 in order to change its tax classification for federal tax purposes from S corporation to C corporation. A corporation must submit Form 2553 to the IRS in order to elect S corporation status. Both forms must be submitted within the required deadlines and comply with all eligibility conditions in order for the IRS to accept them.
In conclusion, retaining S corporation status necessitates adherence to the prerequisites for eligibility and the filing of the necessary paperwork. The S corporation election may be terminated and the company may be taxed as a C corporation if certain conditions are not met.
When a corporation wants to switch from being a S corporation to a C corporation or vice versa, Form 8832 must be submitted. It must be submitted within 75 days of the intended change’s effective date or at any time after that date.