ExpertMedium1 markMultiple Choice
CPA · Question 53 · Area 3: Entity Tax Compliance
An S Corporation has passive investment income (PII) exceeding 25% of gross receipts and has accumulated E&P from C Corp years. If this condition continues for three consecutive years, what happens?
An S Corporation has passive investment income (PII) exceeding 25% of gross receipts and has accumulated E&P from C Corp years. If this condition continues for three consecutive years, what happens?
Answer options:
A.
Nothing, just pays a tax.
B.
The S election is suspended for one year.
C.
The S election is terminated.
D.
The E&P is eliminated.
How to approach this question
1. Identify Sting Tax Conditions: S Corp + AE&P + Excess Passive Income.<br/>2. Consequence 1: Tax on excess net passive income (Year 1-3).<br/>3. Consequence 2: If condition persists for 3 consecutive years, S election terminates.<br/>4. Result: Termination.
Full Answer
C.The S election is terminated.✓ Correct
C
Under IRC §1362(d)(3), an S election is terminated if the corporation has accumulated earnings and profits and passive investment income exceeds 25% of gross receipts for three consecutive taxable years.
Common mistakes
Thinking only the tax applies without termination.
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