Tax Minis: What is an S-Corp?

Taking a look at the S-Corp.

What exactly is an S-Corp? If you’re a tax accountant or a taxpayer who owns shares of an S-Corp you may know the answer but you probably don’t know as much as you should.

In fact, most accountants are familiar with tax law but haven’t actually read the code. This is equivalent to someone who is a sports fan but can only name the big name players on their team.

We all know that one friend who knows all the stats, scores, history and even the inside scoops to a team. We also know some tax accountants who have a similar obsession but for the tax code. This series is meant to bridge the gap between the obsessed nerd and the average everyday accountant.

What Is an S-Corp?

An S-Corp is defined by Code§ 1361(a) as a “Small business Corporation” for which an election under section 1362(a) is in effect for such year. If you’re a tax nerd then you know exactly what I’m talking about but for everyone else you’re probably already tuning me out.

Essentially, at it’s core an S-Corp is a Corporation. The difference, however, is the shareholders of the corporation have made an election to be taxed as a flow through entity under section 1362(a).

How to Qualify as a “Small Business Corporation”

In order for a shareholder to convert a Corporation to an S-Corp the entity must first qualify as a Small Business Corporation. A SBC is defined as a domestic corporation which is not an ineligible corporation and which does not:

  • Have more than 100 shareholders
  • Have a shareholder that is not an individual (other than an estate and some specified trust)
  • Have a non-resident alien as a shareholder, and
  • Have more than 1 class of stock.

Ineligible corporations are defined as:

  • A financial institution which uses the reserve method of accounting for bad debt
  • An insurance company subject to tax under subchapter L, and
  • A DISC or former DISC

Lastly, a specificed trust that can be a shareholder is:

  • A grantor trust owned by a US citizen or resident.
  • A grantor trust for which the grantor has died but trust is still in existence (for a max of 2 years)
  • A trust who inherited shares pursuant to a will (for a max of 2 years)
  • An electing small business trust

This wraps up this tax mini. Tune in next time to learn more about S-Corps and other tax topics in general.

The information contained herein is is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined though consultation with your tax adviser. This article represents the views of the author only and does not necessarily represent the views or professional advice of this publication or the author’s employer.

Jeremias Ramos is a CPA working at a nationally recognized full-service accounting, tax, and consulting firm with offices conveniently located throughout the Northeast. Jeremias specializes in tax and business consulting with focus areas in real estate, professional service providers, medical practitioners, and eCommerce businesses.

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