S Corporation Election Blown By Silly Mistake | USTaxAid

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S Corporation Election Blown By Silly Mistake

Written by Diane Kennedy, CPA on April 6, 2008

All corporations start off as C Corporations. If you want to change to an S Corporation, you file a Form 2553 with the IRS to make the election. So far, so good.

The IRS has certain requirements on who can own the shares of an S Corporation. For example, there is a limit on how many shareholders you can have and the owners have to be individuals. Your LLC can’t own shares in an S Corporation, for example. That’s where a do-it-yourselfer got in trouble. Read on to learn how you can avoid this simple mistake.

A taxpayer got into trouble when she attended a seminar promoting “back of the room” estate planning tools. I’m a huge advocate of having an estate plan, especially since I became a parent for the first time a little over 3 years ago.

There is a certain art, though, of making sure you have the estate plan you want and don’t mess up your tax strategy in the process. In this particular case, the taxpayer set up a Living Trust. Again, so far so good. A Living Trust avoid probate which saves time and money when your estate transfers.

The next step with the Living Trust is to have all ownership transfer to the trust. And a logical step might be to have the shares of an S Corporation transfer to the trust as well. That’s where you can get into trouble. A Living Trust can not own shares in an S Corporation. As soon as the shares transfer, the S Corporate status is voided. The Corporation reverts back to a C Corporation.

It is possible to have the shares of an S Corporation held by a revocable trust. But, it can’t be the “run of the mill” Living Trust. This is one case where you want to have good advice.

One Comment

  1. Tim Larason says:

    An Irrevocable trust, such as used to own life insurance policies or to make lifetime gifts, is a different matter, special provisions and elections are needed to make it qualify.

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