Changing a c corp to an s corp


J

John

As long as a company meets the requirements for an s corp,
can it change to one; or are there other conditions.

My c corp must become a personal holding corporation. It
would be much better to become an s corp. Thanks.
 
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E

Ed Zollars, CPA

John said:
My c corp must become a personal holding corporation. It
would be much better to become an s corp. Thanks.
If your C corporation is going to become a personal holding
company, I would suggest you review the "excess passive
income" rules for S corporations before electing S status.
Otherwise you may find the experience similarly expensive to
being a personal holding company and short lived--your S
election will terminate after three straight years of excess
passive income.

That rule is there specifically to *prevent* C corporations
from selling their operating assets, investing them and then
avoiding PHC treatment by electing S and then waiting out
the built in gain period.
 
J

John

Ed Zollars said:
John wrote:
If your C corporation is going to become a personal holding
company, I would suggest you review the "excess passive
income" rules for S corporations before electing S status.
Otherwise you may find the experience similarly expensive to
being a personal holding company and short lived--your S
election will terminate after three straight years of excess
passive income.

That rule is there specifically to *prevent* C corporations
from selling their operating assets, investing them and then
avoiding PHC treatment by electing S and then waiting out
the built in gain period.
What you say it is there to prevent is pretty much what I
have in mind. You say the S election will teminate after
three years if abused; but does it actually function as an S
for those three years?

That is all I really need, so if it works for three years,
it is worth considering. If worst comes to worst and three
years is not enough, does it simply just become a PHC?

thanks
 
F

Frederick Jorden

What you say it is there to prevent is pretty much what I
have in mind. You say the S election will teminate after
three years if abused; but does it actually function as an S
for those three years?

That is all I really need, so if it works for three years,
it is worth considering. If worst comes to worst and three
years is not enough, does it simply just become a PHC?
But if all income is distributed approximately currently
then a PHC may not be such a problem. In my option much
less a problem than an abusive sub S.
 
E

Ed Zollars, CPA

John said:
That is all I really need, so if it works for three years,
it is worth considering. If worst comes to worst and three
years is not enough, does it simply just become a PHC?
What you need is paid professional advice on this one--it
can't be answered on a totally theoretical level and I don't
do involved volunteer work <grin>. However, my gut reaction
is that the odds are it won't work *easily* to do what you
are suggesting--the tax on excess passive income is meant to
be a penalty tax and will be imposed *IN ADDITION* to having
the income flow through from the S corporation. Your state
may or may not impose a similar tax.

If the amount is significant, you need professional help to
get through this.
 
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H

Harry Boscoe

What you say it is there to prevent is pretty much what I
have in mind. You say the S election will teminate after
three years if abused; but does it actually function as an S
for those three years?

That is all I really need, so if it works for three years,
it is worth considering. If worst comes to worst and three
years is not enough, does it simply just become a PHC?
However, it might not "work for three years", reason being
that there's a tax on the income [it might be the "excess
net passive investment income" or some similarly abstruse
concept, actually, that's subject to the tax] of the S
corporation during those three years (in addition to the
involuntary termination of the S election after the third
year). The drafters of the S corporation tax laws *really*
didn't want you to do just exactly what you *really* want to
do.
 
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