Subchapter S
corporation status terminates if:
• Shareholders agree to revoke the
Subchapter S corporation election,
• Corporation ceases to qualify as a Subchapter S corporation, or
• Corporation violates the passive investment income restrictions on
Subchapter S
corporations with pre-Subchapter S corporation earnings and profits.
A Subchapter S corporation violates the passive
investment income restrictions above if both of the following conditions
occur for three consecutive tax years.
1) It has pre-Subchapter S corporation earnings and
profits at the end of each tax year (that is, it has accumulated retained
earnings from when it was a C corporation, or when it was a Subchapter S corporation
prior to 1983, or had earnings and profits from an acquired C
corporation), and
2) Its passive investment income for each
tax year is more than 25% of gross receipts. For purposes of this rule,
the definition of passive income includes income from passive activities,
royalties, dividends, interest, annuities, and gains from the sale or
exchange of stock or securities.
