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United States Code (Last Updated: May 24, 2014) |
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Title 26. INTERNAL REVENUE CODE |
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SubTitle A. Income Taxes |
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Chapter 1. NORMAL TAXES AND SURTAXES |
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SubChapter S. Tax Treatment of S Corporations and Their Shareholders |
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Part I. IN GENERAL |
§ 1362. Election; revocation; termination
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(a) Election (1) In general Except as provided in subsection (g), a small business corporation may elect, in accordance with the provisions of this section, to be an S corporation.
(2) All shareholders must consent to election An election under this subsection shall be valid only if all persons who are shareholders in such corporation on the day on which such election is made consent to such election.
(b) When made (1) In general An election under subsection (a) may be made by a small business corporation for any taxable year— (A) at any time during the preceding taxable year, or (B) at any time during the taxable year and on or before the 15th day of the 3d month of the taxable year. (2) Certain elections made during 1st 2½ months treated as made for next taxable year If— (A) an election under subsection (a) is made for any taxable year during such year and on or before the 15th day of the 3d month of such year, but (B) either— (i) on 1 or more days in such taxable year before the day on which the election was made the corporation did not meet the requirements of subsection (b) of section 1361, or (ii) 1 or more of the persons who held stock in the corporation during such taxable year and before the election was made did not consent to the election, then such election shall be treated as made for the following taxable year. (3) Election made after 1st 2½ months treated as made for following taxable year If— (A) a small business corporation makes an election under subsection (a) for any taxable year, and (B) such election is made after the 15th day of the 3d month of the taxable year and on or before the 15th day of the 3rd month of the following taxable year, then such election shall be treated as made for the following taxable year. (4) Taxable years of 2½ months or less For purposes of this subsection, an election for a taxable year made not later than 2 months and 15 days after the first day of the taxable year shall be treated as timely made during such year.
(5) Authority to treat late elections, etc., as timely If— (A) an election under subsection (a) is made for any taxable year (determined without regard to paragraph (3)) after the date prescribed by this subsection for making such election for such taxable year or no such election is made for any taxable year, and (B) the Secretary determines that there was reasonable cause for the failure to timely make such election, the Secretary may treat such an election as timely made for such taxable year (and paragraph (3) shall not apply). (c) Years for which effective An election under subsection (a) shall be effective for the taxable year of the corporation for which it is made and for all succeeding taxable years of the corporation, until such election is terminated under subsection (d).
(d) Termination (1) By revocation (A) In general An election under subsection (a) may be terminated by revocation.
(B) More than one-half of shares must consent to revocation An election may be revoked only if shareholders holding more than one-half of the shares of stock of the corporation on the day on which the revocation is made consent to the revocation.
(C) When effective Except as provided in subparagraph (D)— (i) a revocation made during the taxable year and on or before the 15th day of the 3d month thereof shall be effective on the 1st day of such taxable year, and (ii) a revocation made during the taxable year but after such 15th day shall be effective on the 1st day of the following taxable year. (D) Revocation may specify prospective date If the revocation specifies a date for revocation which is on or after the day on which the revocation is made, the revocation shall be effective on and after the date so specified.
(2) By corporation ceasing to be small business corporation (A) In general An election under subsection (a) shall be terminated whenever (at any time on or after the 1st day of the 1st taxable year for which the corporation is an S corporation) such corporation ceases to be a small business corporation.
(B) When effective Any termination under this paragraph shall be effective on and after the date of cessation.
(3) Where passive investment income exceeds 25 percent of gross receipts for 3 consecutive taxable years and corporation has accumulated earnings and profits (A) Termination (i) In general An election under subsection (a) shall be terminated whenever the corporation— (I) has accumulated earnings and profits at the close of each of 3 consecutive taxable years, and (II) has gross receipts for each of such taxable years more than 25 percent of which are passive investment income. (ii) When effective Any termination under this paragraph shall be effective on and after the first day of the first taxable year beginning after the third consecutive taxable year referred to in clause (i).
(iii) Years taken into account A prior taxable year shall not be taken into account under clause (i) unless— (I) such taxable year began after December 31, 1981 , and(II) the corporation was an S corporation for such taxable year. (B) Gross receipts from the sales of certain assets For purposes of this paragraph— (i) in the case of dispositions of capital assets (other than stock and securities), gross receipts from such dispositions shall be taken into account only to the extent of the capital gain net income therefrom, and (ii) in the case of sales or exchanges of stock or securities, gross receipts shall be taken into account only to the extent of the gains therefrom. (C) Passive investment income defined (i) In general Except as otherwise provided in this subparagraph, the term “passive investment income” means gross receipts derived from royalties, rents, dividends, interest, and annuities.
(ii) Exception for interest on notes from sales of inventory The term “passive investment income” shall not include interest on any obligation acquired in the ordinary course of the corporation’s trade or business from its sale of property described in section 1221(a)(1).
(iii) Treatment of certain lending or finance companies If the S corporation meets the requirements of section 542(c)(6) for the taxable year, the term “passive investment income” shall not include gross receipts for the taxable year which are derived directly from the active and regular conduct of a lending or finance business (as defined in section 542(d)(1)).
(iv) Treatment of certain dividends If an S corporation holds stock in a C corporation meeting the requirements of section 1504(a)(2), the term “passive investment income” shall not include dividends from such C corporation to the extent such dividends are attributable to the earnings and profits of such C corporation derived from the active conduct of a trade or business.
(v) Exception for banks, etc. In the case of a bank (as defined in section 581) or a depository institution holding company (as defined in section 3(w)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1813(w)(1)), during the period specified by the Secretary. (g) Election after termination If a small business corporation has made an election under subsection (a) and if such election has been terminated under subsection (d), such corporation (and any successor corporation) shall not be eligible to make an election under subsection (a) for any taxable year before its 5th taxable year which begins after the 1st taxable year for which such termination is effective, unless the Secretary consents to such election.
Amendments
2007—Subsec. (d)(3)(B) to (F). Pub. L. 110–28 added subpars. (B) and (C) and struck out former subpar. (B), which related to gross receipts from dispositions of capital assets (other than stock and securities) being taken into account only to the extent of the capital gain net income therefrom, subpar. (C), which defined passive investment income, subpar. (D), which provided that, in the case of any options dealer or commodities dealer, passive investment income was to be determined by not taking into account any gain or loss from any section 1256 contract or property related to such a contract, subpar. (E), which related to certain dividends not being treated as passive investment income if an S corporation held stock in a C corporation meeting the requirements of section 1504(a)(2), and subpar. (F), which related to the exception from passive investment income for banks and depository institution holding companies.
Subsec. (f)(1). Pub. L. 110–172 substituted “or section 1361(b)(3)(B)(ii)” for “, section 1361(b)(3)(B)(ii), or section 1361(c)(1)(A)(ii)” in introductory provisions and “or section 1361(b)(3)(C)” for “, section 1361(b)(3)(C), or section 1361(c)(1)(D)(iii)” in subpar. (B).
2005—Subsec. (d)(3)(F). Pub. L. 109–135 substituted “a depository institution holding company (as defined in section 3(w)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1813(w)(1))” for “a bank holding company (within the meaning of section 2(a) of the Bank Holding Company Act of 1956 (12 U.S.C. 1841(a))), or a financial holding company (within the meaning of section 2(p) of such Act)”.
2004—Subsec. (d)(3)(F). Pub. L. 108–357, § 237(a), added subpar. (F).
Subsec. (f). Pub. L. 108–357, § 238(a)(5), inserted “or a qualified subchapter S subsidiary, as the case may be” after “S corporation” in concluding provisions.
Subsec. (f)(1). Pub. L. 108–357, § 238(a)(1), inserted “, section 1361(b)(3)(B)(ii),” after “subsection (a)” in introductory provisions.
Pub. L. 108–357, § 231(b)(1), inserted “or section 1361(c)(1)(A)(ii)” after “section 1361(b)(3)(B)(ii),” in introductory provisions.
Subsec. (f)(1)(B). Pub. L. 108–357, § 238(a)(2), inserted “, section 1361(b)(3)(C),” after “subsection (d)”.
Pub. L. 108–357, § 231(b)(2), inserted “or section 1361(c)(1)(D)(iii)” after “section 1361(b)(3)(C),”.
Subsec. (f)(3)(A). Pub. L. 108–357, § 238(a)(3), amended subpar. (A) generally. Prior to amendment, subpar. (A) read as follows: “so that the corporation is a small business corporation, or”.
Subsec. (f)(4). Pub. L. 108–357, § 238(a)(4), amended par. (4) generally. Prior to amendment, par. (4) read as follows: “the corporation, and each person who was a shareholder in the corporation at any time during the period specified pursuant to this subsection, agrees to make such adjustments (consistent with the treatment of the corporation as an S corporation) as may be required by the Secretary with respect to such period,”.
1999—Subsec. (d)(3)(C)(ii). Pub. L. 106–170 substituted “section 1221(a)(1)” for “section 1221(1)”.
1996—Subsec. (b)(5). Pub. L. 104–188, § 1305(b), added par. (5).
Subsec. (d)(3). Pub. L. 104–188, § 1311(b)(1)(A), in heading substituted “accumulated” for “subchapter C”.
Subsec. (d)(3)(A)(i)(I). Pub. L. 104–188, § 1311(b)(1)(B), substituted “accumulated” for “subchapter C”.
Subsec. (d)(3)(B) to (E). Pub. L. 104–188, § 1311(b)(1)(C), redesignated subpars. (C) to (F) as (B) to (E), respectively, and struck out former subpar. (B) which read as follows:
“(B) Subchapter c earnings and profits.—For purposes of subparagraph (A), the term ‘subchapter C earnings and profits’ means earnings and profits of any corporation for any taxable year with respect to which an election under section 1362(a) (or under section 1372 of prior law) was not in effect.”
Subsec. (d)(3)(F). Pub. L. 104–188, § 1311(b)(1)(C), redesignated subpar. (F) as (E).
Pub. L. 104–188, § 1308(c), added subpar. (F).
Subsec. (f). Pub. L. 104–188, § 1305(a), amended subsec. (f) generally. Prior to amendment, subsec. (f) read as follows:
“(f) Inadvertent Terminations.—If—
“(1) an election under subsection (a) by any corporation was terminated under paragraph (2) or (3) of subsection (d),
“(2) the Secretary determines that the termination was inadvertent,
“(3) no later than a reasonable period of time after discovery of the event resulting in such termination, steps were taken so that the corporation is once more a small business corporation, and
“(4) the corporation, and each person who was a shareholder of the corporation at any time during the period specified pursuant to this subsection, agrees to make such adjustments (consistent with the treatment of the corporation as an S corporation) as may be required by the Secretary with respect to such period,
then, notwithstanding the terminating event, such corporation shall be treated as continuing to be an S corporation during the period specified by the Secretary.”
1988—Subsec. (d)(3)(D)(v). Pub. L. 100–647, § 1006(f)(6)(A), struck out cl. (v) which related to special rule for options and commodities dealers.
Subsec. (d)(3)(E). Pub. L. 100–647, § 1006(f)(6)(B), added subpar. (E).
Subsec. (e)(5)(B). Pub. L. 100–647, § 1007(g)(9), substituted “Subsection (d)” for “Subsection (d)(2)”.
1984—Subsec. (b)(3)(B). Pub. L. 98–369, § 721(l)(2), substituted “on or before the 15th day of the 3rd month of the following taxable year” for “on or before the last day of such taxable year”.
Subsec. (b)(4). Pub. L. 98–369, § 721(l)(1), added par. (4).
Subsec. (d)(3)(D)(v). Pub. L. 98–369, § 102(d)(2), added cl. (v).
Subsec. (e)(2). Pub. L. 98–369, § 721(g)(2), substituted “as provided in paragraph (3) and subparagraphs (C) and (D) of paragraph (6)” for “as provided in paragraph (3)”.
Subsec. (e)(3)(B). Pub. L. 98–369, § 721(h), struck out “All” in heading, and substituted “subsection” for “paragraph” and “S short year and all persons who are shareholders in the corporation on the first day of the C short year” for “S termination year” in text.
Subsec. (e)(6)(C). Pub. L. 98–369, § 721(g)(1), added subpar. (C).
Subsec. (e)(6)(D). Pub. L. 98–369, § 721(t), added subpar. (D).
Effective Date Of Amendment
Pub. L. 110–28, title VIII, § 8231(b),
Amendment by Pub. L. 109–135 effective as if included in the provision of the American Jobs Creation Act of 2004, Pub. L. 108–357, to which such amendment relates, see section 413(d) of Pub. L. 109–135, set out as a note under section 1361 of this title.
Pub. L. 108–357, title II, § 231(c)(2),
Pub. L. 108–357, title II, § 237(b),
Pub. L. 108–357, title II, § 238(b),
Amendment by Pub. L. 106–170 applicable to any instrument held, acquired, or entered into, any transaction entered into, and supplies held or acquired on or after
Pub. L. 104–188, title I, § 1305(c),
Amendment by sections 1308(c) and 1311(b)(1) of Pub. L. 104–188 applicable to taxable years beginning after
Amendment by Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title.
Amendment by section 102(d)(2) of Pub. L. 98–369 applicable to positions established after
Amendment by section 721(g), (h), (l), (t) of Pub. L. 98–369 effective as if included in the Subchapter S Revision Act of 1982, Pub. L. 97–354, except that amendment by section 721(g)(1) is not applicable to certain qualified stock purchases, amendment by section 721(l) is applicable to any election under this section (or any corresponding provision of prior law) made after
Effective Date
Section applicable to taxable years beginning after
Miscellaneous
Pub. L. 104–188, title I, § 1317(b),
Pub. L. 98–369, div. A, title I, § 102(d)(3),