Section 1362: Election; revocation; termination
Internal Revenue Code
§1362. Election; revocation; termination
(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.
(1) In general
An election under subsection (a) may be made by a small business corporation for any taxable year—
(B) at any time during the taxable year and on or before the 15th day of the 3d month of the taxable year.
(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
(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.
(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.
(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).
(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.
(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.
(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
(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 the corporation was an S corporation for such taxable year.
(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.
(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 (
(II) dividends on assets required to be held by such bank or company, including stock in the Federal Reserve Bank, the Federal Home Loan Bank, or the Federal Agricultural Mortgage Bank or participation certificates issued by a Federal Intermediate Credit Bank.
(A) S short year
The portion of such year ending before the 1st day for which the termination is effective shall be treated as a short taxable year for which the corporation is an S corporation.
(B) C short year
The portion of such year beginning on such 1st day shall be treated as a short taxable year for which the corporation is a C corporation.
(2) Pro rata allocation
Except as provided in paragraph (3) and subparagraphs (C) and (D) of paragraph (6), the determination of which items are to be taken into account for each of the short taxable years referred to in paragraph (1) shall be made—
(i) the amount of each of the items of income, loss, deduction, or credit described in section 1366(a)(1)(A), and
(B) then by assigning an equal portion of each amount determined under subparagraph (A) to each day of the S termination year.
(B) Shareholders must consent to election
An election under this subsection shall be valid only if all persons who are shareholders in the corporation at any time during the S short year and all persons who are shareholders in the corporation on the first day of the C short year consent to such election.
(4) S termination year
For purposes of this subsection, the term "S termination year" means any taxable year of a corporation (determined without regard to this subsection) in which a termination of an election made under subsection (a) takes effect (other than on the 1st day thereof).
(A) In general
The taxable income for the short year described in subparagraph (B) of paragraph (1) shall be placed on an annual basis by multiplying the taxable income for such short year by the number of days in the S termination year and by dividing the result by the number of days in the short year. The tax shall be the same part of the tax computed on the annual basis as the number of days in such short year is of the number of days in the S termination year.
(B) Section 443(d)(2) to apply
Subsection (d) of section 443 shall apply to the short taxable year described in subparagraph (B) of paragraph (1).
(A) Short years treated as 1 year for carryover purposes
The short taxable year described in subparagraph (A) of paragraph (1) shall not be taken into account for purposes of determining the number of taxable years to which any item may be carried back or carried forward by the corporation.
(B) Due date for S year
The due date for filing the return for the short taxable year described in subparagraph (A) of paragraph (1) shall be the same as the due date for filing the return for the short taxable year described in subparagraph (B) of paragraph (1) (including extensions thereof).
(C) Paragraph (2) not to apply to items resulting from section 338
Paragraph (2) shall not apply with respect to any item resulting from the application of section 338.
(D) Pro rata allocation for S termination year not to apply if 50-percent change in ownership
Paragraph (2) shall not apply to an S termination year if there is a sale or exchange of 50 percent or more of the stock in such corporation during such year.
(A) was not effective for the taxable year for which made (determined without regard to subsection (b)(2)) by reason of a failure to meet the requirements of section 1361(b) or to obtain shareholder consents, or
(2) the Secretary determines that the circumstances resulting in such ineffectiveness or termination were inadvertent,
(3) no later than a reasonable period of time after discovery of the circumstances resulting in such ineffectiveness or termination, steps were taken—
(A) so that the corporation for which the election was made or the termination occurred is a small business corporation or a qualified subchapter S subsidiary, as the case may be, or
(4) the corporation for which the election was made or the termination occurred, and each person who was a shareholder in such corporation at any time during the period specified pursuant to this subsection, agrees to make such adjustments (consistent with the treatment of such corporation as an S corporation or a qualified subchapter S subsidiary, as the case may be) as may be required by the Secretary with respect to such period,
then, notwithstanding the circumstances resulting in such ineffectiveness or termination, such corporation shall be treated as an S corporation or a qualified subchapter S subsidiary, as the case may be, 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.
(Added
Editorial Notes
Amendments
2018—Subsec. (d)(3)(C)(v).
Subsec. (f).
2014—Subsec. (d)(3)(A)(iii).
"(I) such taxable year began after December 31, 1981, and
"(II) the corporation was an S corporation for such taxable year."
2007—Subsec. (d)(3)(B) to (F).
Subsec. (f)(1).
2005—Subsec. (d)(3)(F).
2004—Subsec. (d)(3)(F).
Subsec. (f).
Subsec. (f)(1).
Subsec. (f)(1)(B).
Subsec. (f)(3)(A).
Subsec. (f)(4).
1999—Subsec. (d)(3)(C)(ii).
1996—Subsec. (b)(5).
Subsec. (d)(3).
Subsec. (d)(3)(A)(i)(I).
Subsec. (d)(3)(B) to (E).
"(B)
Subsec. (d)(3)(F).
Subsec. (f).
"(f)
"(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).
Subsec. (d)(3)(E).
Subsec. (e)(5)(B).
1984—Subsec. (b)(3)(B).
Subsec. (b)(4).
Subsec. (d)(3)(D)(v).
Subsec. (e)(2).
Subsec. (e)(3)(B).
Subsec. (e)(6)(C).
Subsec. (e)(6)(D).
Statutory Notes and Related Subsidiaries
Effective Date of 2014 Amendment
Amendment by
Effective Date of 2007 Amendment
Effective Date of 2005 Amendment
Amendment by
Effective Date of 2004 Amendment
Effective Date of 1999 Amendment
Amendment by
Effective Date of 1996 Amendment
Amendment by sections 1308(c) and 1311(b)(1) of
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1984 Amendment
Amendment by section 102(d)(2) of
Amendment by section 721(g), (h), (l), (t) of
Effective Date
Section applicable to taxable years beginning after Dec. 31, 1982, except that in the case of a taxable year beginning during 1982, subsec. (d)(3) of this section and
Treatment of Certain Elections Under Prior Law
Subchapter S Election
"(A) becomes a small business corporation (as defined in section 1361(b) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954]) at any time before the close of the 75th day after the date of the enactment of this Act [July 18, 1984], and
"(B) makes the election under section 1362(a) of such Code before the close of such 75th day,
then such dealer shall be treated as having received approval for and adopted a taxable year beginning on the first day during 1984 on which it was a small business corporation (as so defined) or such other day as may be permitted under regulations and ending on the date determined under section 1378 of such Code and such election shall be effective for such taxable year."