Source: https://www.currentfederaltaxdevelopments.com/blog/tag/1362
Timestamp: 2019-06-26 08:22:05
Document Index: 571276601

Matched Legal Cases: ['§1362', '§1362', '§469', '§1362', '§1', '§301']

Image Copyright waldemarus / 123RF Stock Photo
Relief Granted for Inadvertent Termination Due to Excess Passive Income of S Corporation
S corporation have always had issues with the risk of becoming a C corporation by accident. One of the key problems for an S corporations is the risk of having excess passive income (as defined by §1362(d)(3)(C)(i)) if the S corporation is determined to have accumulated earnings and profits as of the end of the tax year. If the corporation has such excess passive income for three straight years, the S election terminates at the end of the third year. [IRC §1362(d)(3)]
Generally, excess passive income is defined as the corporation having passive investment income in excess of 25% of its gross receipts for 3 consecutive years. Despite the use of the word “passive” the income being discussed here is not generally income related to the passive activity rules of IRC §469. Rather, passive income is generally defined as gross receipts from royalties, rents, dividends, interest, and annuities. [IRC §1362(d)(3)(C)(i)] Various special exceptions apply to the inclusion of these types of income, most importantly related to rents derived in the active trade or business of renting property. [IRC Reg. §1.1362-2(c)(5)(ii)(B)(2)]
LLC Issusance of Preferred Interests to IRA and Issuance of Other Classes of Interest Terminated S Election, IRS Grants Retroactive Relief in PLR
January 31, 2015 by Ed Zollars, CPA
When a LLC “checks the box” by filing a Form 2553 to elect to be treated as a corporation and simultaneously elect S status, it must live by all the S corporation restrictions. That includes the restriction on only having one class of “stock” issued by the entity during the time it wishes to remain an S corporation.
In reality, there is no such federal tax entity as an “LLC”—the structure was originally designed when the first statute was adopted by Wyoming decades ago to be an entity for which there was no federal tax treatment specifically mandated. To this day the IRC does not have provisions outlining the tax treatment of “LLCs” but rather, under the check the box regulations found at Reg. §301.7701‑2 the entity is treated for federal tax purposes as one of the entities that the IRC knows about.
January 31, 2015 /Ed Zollars, CPA