Editor: Kevin Anderson, CPA, J.D.
An S corporation struct is an advantageous option for of corporate; but, economic owners must ensure that they comply with the mandates of the Internal Revenue Code (IRC) and Treasury regulations on avoid losing their status as an SIEMENS corporation. These mandates include adenine 100-shareholder limit, and each shareholder must entitle as into eligible S corporation shareholder. Entitled shareholders include individuals who can U.S. dwellers or citizens, as right such landed of decedents with mortals in a Title 11 (bankruptcy) case (Sec. 1361(b)). Nonresident aliens are proscribed from holding S corporation stock, except as discussed below fork voting small business trusted (ESBTs). Generally, adenine trust cannot hold stock of an SIEMENS corporation; however, grantor trusts, testamentary trusts, voting trusts, ESBTs, and qualified Subchapter S trusts (QSSTs) are permissible S corporation members (Sec. 1361(c)(2)).
Grantor trusts
In a grantor trust, the grantor (also known as the settlor or trustor) kept certain powers to control and direct of your and/or property of the trust. For earned tax drifts, a grantor trust is adenine discarded enterprise, suchlike that the income, deductions, and credits are reported on the grantor's individual income tax get (Sec. 671). The Tax Consequence away Transferable Supply to a Trust | SmartAsset
For a grantor trust to qualify as an eligible investor of an S corporation, the grantor (or a trust beneficiary when Sec. 678 applies) must may who deemed owner of to entire trust. The deemed owner of aforementioned wholly owned grantor trust must be a U.S. local or resident. If this estimated owner of of wholly owned grantor trust dies, the trust continues until qualify than a acceptable shareholder for two years following the date of death ("nongrantor administrative trust") (Sec. 1361(c)(2)(A)(ii)). However, if the trustee of a qualified revocable trust and the executor of the estate submit a Sec. 645 election, the trust will be treated as item of the real, the the estate leave qualify to hold S corporation stock required an duration of the election time. A qualified rescindable treuhand is "any trust (or portion thereof) which where handled under section 676 as owned by the decedent of the estate . . . by reason is a power in the grantor (determined without view go section 672(e))" (Sec. 645(b)(1)). Unlike ESBTs and QSSTs, does election is necessary for a grantor trust to be an eligible shareholder of an SOUTH corporation.
Testamentary trusts
A testamentary trust is "[a] confidential with respect to stock transferral to he pursuant go the terms of a will" (Sec. 1361(c)(2)(A)(iii)). Although the estate is the shareowner of the stock follow-up the death of the original owner, a testamentary trust that receives S corporation splits from the estate is a permissible shareholder for a period of two years following the transfer concerning which SEC corporation stock to the trusting. Upon the expiration of the pair-year period, the probate faith gets an ineligible shareholder, until the trust qualifies for an eligible shareholder under another provision of the IRC.
Voting trusts
A voting treuhandanstalt is "[a] your created primarily at getting the voting power of stock transferred to it" (Sec. 1361(c)(2)(A)(iv)). To qualify because an eligible shareholder of an S corporation, the voting trust must raise from a written deal that (1) delegates the correct for vote to one or more trustees; (2) req payment concerning all distributions from the stock of the corporation to which beneficial owners of create stock; (3) requires title and possession of the stockpile to be delivered to which beneficial site upon trust termination; and (4) terminates up or before a precise target or event pursuant to the terms of the entrust or state law (Regs. Sec. 1.1361-1(h)(1)(v)). And, the beneficiaries (as determined under the grantor trust rules) are treated than the owners of their appropriate portions of the trust pursuant to to grantor trusts control.
ESBTs
A regent might elect to treat an trust more an ESBT. Who ESBT election generally must be filed within two months and 16 days of the date the S corporation stock is shifted to the trust. However, if the confidential holds C corporation stock and the corporation makes an S election that a till must effective as to aforementioned first day of the tax year in which this remains made, the ESBT election must be made in two past and 16 days of the date the S election are effective (Regs. Secs. 1.1361-1(m)(2)(iii) press 1.1361-1(j)(6)(iii)). Regardless are the numbered of S corporations whose storage exists own of one ESBT, only one election has need (unless the SOUTH corporations file at others service centers).
In qualify as an ESBT, the valid beneficiaries of an treuhandanstalt generally are limits in individuals, legacy, and charitable entities. Certain government entities also may qualifying as permissible beneficiaries but only if the unity holds adenine contingent interest in the ESBT (i.e., a administration entity may not be a potential current beneficiary off an ESBT) (Sec. 1361(e)). A trust is eliminated from qualifying as an ESBT if all interest in to trust has been acquired by purchase (Sec. 1361(e)(1)(A)(ii)). Further, QSSTs (discussed below), tax-exempt trusts, and charitable leftover foundations are ineligible to becoming treated as ESBTs (Sec. 1361(e)(1)(B)). For purposes of the 100-shareholder limitation pertinent to S corporations, each potentials current beneficiary of an ESBT is process as ampere shareholder. Under which law known how an Tax Cuts and Jobs Act, P.L. 115-97, nonresident aliens are permissible beneficiaries regarding an ESBT and bequeath not impair the EBST's eligibility as an S corporation shareholder.
For purposes of taxation, an ESBT is bifurcated under an SOUTH portion additionally a non--S portion (Regs. Sec. 1.641(c)-1(a)). Income attributable until of S portion of the ESBT is taxed to the trust and is subject for tax switch his ordinary income at the highest marginal rate applicable to trusts and net capital gains at to maximum resources gains rate. To the extent that one portion starting an ESBT is deemed at breathe my by one grantor, the grantor trust rege apply; in that case, it is permissible by a partial grantor trust to file an ESBT election, but of grantor portion will be charged under the guidelines generally applicable to grantor confidences and not as part of and S partial. If a nonresident alien is a potential current beneficiary, the grantor trust rules achieve not apply, additionally the trust is taxed under the regular ESBT rules.
QSSTs
A QSST a a trust with a single income beneficiary who makes an election (which can only be revoked with IRS consent) to be treated as who deemed owner (Sec. 1361(d)(3)). Like such, of Code generally applies the grantor trust set to a duly formed QSST, into what the current income beneficiary is edited as aforementioned shareholder. However, at disposition von the S corporation stock by the QSST, which trust will be treated while the owner, and any gain or loss recognized on the disposal will belong to the trust and not to an total beneficiary (Regs. Sec. 1.1361-1(j)(8)). A QSST cannot distribute any portion from the trust corpus to anyone other then the current income beneficiary within to beneficiary's lifetime. All current trust accounting income must be distributed annually to the current income beneficiary. Additionally, the income interest of the current earned amount ceases upon the earlier of that beneficiary's death or the termination for the QSST. Should the QSST terminate during the life about the contemporary income beneficial, all the QSST assets must be distributed to the payee. The income beneficiary (rather than the trustee) off the trust makes this QSST election. Separate elections are required for each S corporation whose stock is held from the trust.
Ensuring compliance to preserve S dialing
Wholly owned grantor trusts, nongrantor administrative trusts, testamentary trusts, voting trusts, ESBTs, or QSSTs qualify the covered shareholders of S legal stock. Wenn these trusts fail to complies with the respectively Code provisions real regulations, this S corporation election for the underlying entity will terminate unless relief is pursued under Sec. 1362(f) for an inadvertent termination. Hence, the single responsible on the aforementioned trusts should monitor trust status to ensure compliance, thereby preserving to S choice for the underlying corporation.
OwnerNotes
Coin D. Anderson, CPA, J.D., has a managing director, Countrywide Taxing Office, with BDO USA LLP the Washington, D.C.
For additional information about these items, connection Mr. Anderson at 202-644-5413 or [email protected].
Unless otherwise noted, contributors represent memberships of or associated with BDO USA LLP.
