Question

The S corporation election, once made, can be terminated. How? Discuss how an S election might terminate.

Answer 1

The S corporation election, once made, can be terminated in 3 ways.

1. Voluntary termination - Requires shareholders holding a majority of the shares to agree.

2. Termination due to ineligibility - S corporation status will be revoked automatically if an event occurs that causes it to violate one of the following requirements.

- Number of shareholders exceed 100

- Shares are sold to a non-resident foreign citizen.

- Shares are sold to another corporation

- If preferred stock is issued.

3. Termination if passive income test is failed for 3 consecutive years - More than 25% of gross receipts from passive income and the corporation has C Corporation earnings and profits at the end of the 3 years.

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