This checklist should be used only as a guide.
A corporation is allowed to make an S election only if, with respect to that corporation, all of the following questions can be answered affirmatively:
- Does the corporation meet the federal income tax definition of a corporation?
- Is the corporation organized in the U.S. or under the laws of the U.S. or any state or territory?
- Does the corporation avoid classification as any of the following?:
- A domestic international sales corporation (DISC) or former DISC
- A corporation which has a possessions tax credit election in effect
- A bank or domestic building and loan association or an insurance company
- Does the corporation have no more than 75 shareholders (counting husband and wife as one shareholder)?
- Are all shareholders either individuals (none of whom are nonresident aliens), estates or certain kinds of trusts?
- Does the corporation have only one class of stock, taking into account that so-called “debt” may sometimes be reclassified as a second class of stock, and that non pro rata distributions may sometimes create a second class of stock?
- Is the corporation’s taxable year, or does the corporation intend to adopt, one of the following?:
- A calendar year
- A year for which the corporation establishes a business purpose
- A “grandfathered” fiscal year
- A 52/53 week year ending with reference to the last day of December
- An elective non-permitted fiscal year with respect to which a corporation makes required payments
For a corporation’s first taxable year beginning after 1996, the rules relating to questions 3, 4, and 6 are modified as follows:
3. Banks and other financial institutions are eligible to be S corporations unless they use the reserve method of accounting for bad debts, and a new type of trust (electing small business trusts) can be a shareholder.
4. The maximum number of shareholders is 75.
6. S corporations are no longer prohibited from owning 80% or more of the stock of another corporation.