Frequently Asked Questions
Who is eligible for the Election to Terminate S Corporation Taxable Year?
Requires a shareholder to terminate their entire interest in the corporation and the consent of all affected shareholders.
How does the Election to Terminate S Corporation Taxable Year work?
Allows an S corporation to treat the tax year as two separate years when a shareholder terminates their interest, allowing for specific allocation of income/loss items to the periods before and after the termination.
What law authorizes the Election to Terminate S Corporation Taxable Year?
The Election to Terminate S Corporation Taxable Year is authorized under IRC §1377 of the Internal Revenue Code (Title 26, United States Code).
Statutory Text — IRC §1377
Source: Internal Revenue Code, Title 26, United States Code
§ 1377. Definitions and special rule(a) Pro rata shareFor purposes of this subchapter—(1) In generalExcept as provided in paragraph (2), each shareholder’s pro rata share of any item for any taxable year shall be the sum of the amounts determined with respect to the shareholder—(A) by assigning an equal portion of such item to each day of the taxable year, and
(B) then by dividing that portion pro rata among the shares outstanding on such day.
(2) Election to terminate year(A) In generalUnder regulations prescribed by the Secretary, if any shareholder terminates the shareholder’s interest in the corporation during the taxable year and all affected shareholders and the corporation agree to the application of this paragraph, paragraph (1) shall be applied to the affected shareholders as if the taxable year consisted of 2 taxable years the first of which ends on the date of the termination.
(B) Affected shareholdersFor purposes of subparagraph (A), the term “affected shareholders” means the shareholder whose interest is terminated and all shareholders to whom such shareholder has transferred shares during the taxable year. If such shareholder has transferred shares to the corporation, the term “affected shareholders” shall include all persons who are shareholders during the taxable year.
(b) Post-termination transition period(1) In generalFor purposes of this subchapter, the term “post-termination transition period” means—(A) the period beginning on the day after the last day of the corporation’s last taxable year as an S corporation and ending on the later of—(i) the day which is 1 year after such last day, or
(ii) the due date for filing the return for such last year as an S corporation (including extensions),
(B) the 120-day period beginning on the date of any determination pursuant to an audit of the taxpayer which follows the termination of the corporation’s election and which adjusts a subchapter S item of income, loss, or deduction of the corporation arising during the S period (as defined in section 1368(e)(2)), and
(C) the 120-day period beginning on the date of a determination that the corporation’s election under section 1362(a) had terminated for a previous taxable year.
(2) Determination definedFor purposes of paragraph (1), the term “determination” means—(A) a determination as defined in section 1313(a), or
(B) an agreement between the corporation and the Secretary that the corporation failed to qualify as an S corporation.
(3) Special rules for audit related post-termination transition periods(A) No application to carryoversParagraph (1)(B) shall not apply for purposes of section 1366(d)(3).
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