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More S Corporations in the Family Way

The American Jobs Creation Act of 2004 opened up the S corporation form of doing business to a wider range of small- and mid-sized business operations. For instance, the 2004 act enables you to elect to treat all family members as a single shareholder.

This special election enables more business entities to benefit from the S corporation rules. It also paves the way for future expansion without forfeiting any tax breaks.

Now the IRS has released new guidance concerning the S corporation election. A new IRS Notice applies to elections made for the 2005 tax year.

Background: S corporations offer several tax advantages to small-business owners. Significantly, you are protected from personal liability while you avoid the double taxation that plagues regular C corporations. The income and losses from the Scorporation are passed through to the owners and reported on their individual returns.

Under the 2004 tax act, some of the restrictions for choosing S corporation status were loosened. For instance, the maximum number of shareholders permitted was increased from 75 to 100. Even better: Any family member may elect to treat all members of the family as a single shareholder for this purpose.

The new IRS Notice says that the election can include

*Common ancestor;

*Lineal descendents of the common ancestor;

*Spouses or former spouses of lineal descendents of the common ancestors; and

*Certain beneficiaries of electing small business trusts (ESBTs) who are members of the family.

Note that two or more elections can be made for the same S corporation. The members of one family for which the election has been made (the “inclusive family”) may include the members of another family for which the election has also been made (the “subsumed family”). In this case, the members of the inclusive family are counted as one shareholder as long as their election remains in effect. The members of the subsumed family are not counted as a separate shareholder.

The S corporation must be notified of the election. This notification should include

1. The name of the family member making the election;

2. The common ancestor of the family to which the election applies; and

3. The first tax year the election is effective.

Advisory: The election remains in effect until it is terminated. Forthcoming regulations are expected to address this issue.

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	[ return to list ] More S Corporations in the Family Way The American Jobs Creation Act of 2004 opened up the S corporation form of doing business to a wider range of small- and mid-sized business operations. For instance, the 2004 act enables you to elect to treat all family members as a single shareholder. This special election enables more business entities to benefit from the S corporation rules. It also paves the way for future expansion without forfeiting any tax breaks. Now the IRS has released new guidance concerning the S corporation election. A new IRS Notice applies to elections made for the 2005 tax year. Background: S corporations offer several tax advantages to small-business owners. Significantly, you are protected from personal liability while you avoid the double taxation that plagues regular C corporations. The income and losses from the Scorporation are passed through to the owners and reported on their individual returns. Under the 2004 tax act, some of the restrictions for choosing S corporation status were loosened. For instance, the maximum number of shareholders permitted was increased from 75 to 100. Even better: Any family member may elect to treat all members of the family as a single shareholder for this purpose. The new IRS Notice says that the election can include Common ancestor; Lineal descendents of the common ancestor; Spouses or former spouses of lineal descendents of the common ancestors; and Certain beneficiaries of electing small business trusts (ESBTs) who are members of the family. Note that two or more elections can be made for the same S corporation. The members of one family for which the election has been made (the “inclusive family”) may include the members of another family for which the election has also been made (the “subsumed family”). In this case, the members of the inclusive family are counted as one shareholder as long as their election remains in effect. The members of the subsumed family are not counted as a separate shareholder. The S corporation must be notified of the election. This notification should include 1. The name of the family member making the election; 2. The common ancestor of the family to which the election applies; and 3. The first tax year the election is effective. Advisory: The election remains in effect until it is terminated. Forthcoming regulations are expected to address this issue. [ return to list ]
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