S-Election termination

[KAWalton]

What is the easiest way to terminate an S-Election?

[Matt Sova]

Want do want to do?

If you want the S to become a C Corp you have to send a letter to the IRS with all shareholders consenting to revoke the S-Corp.

[KAWalton]

Thanks

Well, my client came to me and had already set up an S-Election for their business and I found out that their income was completly rental income. From what I know an S-Elected Corporation can not have the majority of its income from rental income, so I was going to try to terminate the S-election and have them file a tax return as a regular C Corporation.

[BOB W]

Well, my client came to me and had already set up an S-Election for their business and I found out that their income was completly rental income. From what I know an S-Elected Corporation can not have the majority of its income from rental income, so I was going to try to terminate the S-election and have them file a tax return as a regular C Corporation.

Rental Income on an S Corp is allowed but not for a SCorp that was ever a C corp with accumulated E&P. At least I'm pretty sure that is the way it goes.....

ADDED: Here is a link:

http://www.nysscpa.org/cpajournal/2006/1006/essentials/p44.htm

Accumulated E&P only comes into play when the Corp was a C Corp first.

[les grans]

"...an S-Elected Corporation can not have the majority of its income from rental income" you say. Simply put, this is not the case. It's much much more complicated than that.

Study this more carefully - you'll find that you've got a problem *only* if the S corporation used to be a C corporation [or has merged with one] *and* has "accumulated earnings and profits".

Just for starters: Was the corporation a C corporation in the past, during which time it was making profits, and has the corporation now ceased its business activity and is it going to lease out its building? This is a classic scenario, and it's the one that the tax law targets.

We need more facts....

For more info about the C corporation revocation (and the passive investment income limitations, too) you should check out IRC sections 1362 and 1375.

[KAWalton]

S-Election

Well, my boss is the one that told me they could not file as an S-Corporation because of the rental income. This business was never a C-Corporation. They own a building(mini-mall) and are renting out spaces. All the income for them is the rental income. My employer has filed their tax return as a C-Corporation since they began business, overlooking the S-Election status. They have been taking depreciation on the business. I am trying to figure out if I need to file as an S-Corp and amend the past years, including their personal returns, or terminate the S-Election and continue filing as a C-Corp. The IRS sent them a letter asking what their status should be.

[veritas]

Not knowing all the facts

I would make the following observations:

1. It is probably malpractice to put real estate in a corporation.

2. If I had real estate in a corporation it would most likely be an S-Corp from the get go.

3. Your boss should not prepare any more tax returns.

[les grans]

>> 3. Your boss should not prepare any more tax returns.<<

Not to worry; if he's like my boss, he doesn't prepare any. And he doesn't read or review any, either. He just ... signs ... them. Yuk yuk.

[Uncle Sam]

S Corp - Rental Real Estate

I obtained a client a few years ago - where rental property was placed into a corporation over 30 years ago - started out as a C Corp - then became S Corp.
The only asset of the corporation is rental real estate - a medical office building - 3 tenants.
One of the tenants is the father of the two adult children that own the S Corp. Neither child has ANY business connection to the corporation other than ownership.
The two children get full distributions of the profits. All and any AE&P have already been taken out.
I normally don't advise corporate ownership of real estate - rental or not. It creates double taxation of capital gains when sold.

[BOB W]

I obtained a client a few years ago - where rental property was placed into a corporation over 30 years ago - started out as a C Corp - then became S Corp.
The only asset of the corporation is rental real estate - a medical office building - 3 tenants.
One of the tenants is the father of the two adult children that own the S Corp. Neither child has ANY business connection to the corporation other than ownership.
The two children get full distributions of the profits. All and any AE&P have already been taken out.
I normally don't advise corporate ownership of real estate - rental or not. It creates double taxation of capital gains when sold.

That is the key to an Scorp that was a C Corp>>>Make sure ALL Accumulate E&P are withdrawn. Then there is no problem with the SCorp owning retal real estate.

[KAWalton]

Thanks

Thanks to everyones response. Don't worry he is not preparing any more returns. He retired last year.