Navigating S Corporation Pitfalls and Preserving Your Status

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.