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Terminating the S Election
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When S Corporation Status Terminates
The S corporation status will terminate as a result of any of the following:
- Holders of a majority of the corporation's stock (any combination of voting and non-voting common stock) consent to a voluntary revocation;
- The corporation fails to meet any or all of the eligibility requirements (qualifications) for S corporation status; or
- More than 25% of the corporation's gross receipts come from passive investment income for three consecutive years and the corporation had C corporation earnings and profits at the end of each year. The S corporation status is terminated as of the beginning of the fourth year.
Re-electing: 5 Years
Once an S corporation election is terminated or revoked, a new election cannot be made for five years unless the IRS consents to an earlier election. If the termination occurs in mid-year, the corporation will have two short years, a short S year and a short C year. Earnings are prorated on a daily basis to each of the short years. A special election may be made to "cut off" net income at the exact date of conversion.
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