QUALIFICATION AS AN S CORPORATION MAY BE CRITICAL TO ACHIEVING A BUSINESS’ tax objectives; however, the S corporation rules contain many traps for the unwary. In particular, S corporations may inadvertently invalidate or terminate their S elections. Qualified subchapter S subsidiaries, or QSubs, may face similar issues. Section 1362(f) of the Internal Revenue Code provides relief for inadvertently invalid S elections, QSub elections, and terminations under certain circumstances; however, to actually obtain relief, a taxpayer may need to submit a private letter ruling (PLR) to the Internal Revenue Service (IRS), which can be an expensive and time-consuming process. The IRS has provided simplified procedures for taxpayers to obtain relief for noncompliance with the S corporation and QSub rules in Rev. Proc. 2022-19, which allows for retroactive corrective relief for inadvertently invalid and terminated S elections and QSub elections under certain circumstances, without requiring taxpayers to obtain a PLR. A. S Corporation & QSub Overview An “S corporation” is a small business corporation with a valid S election in effect. A “small business corporation” is a domestic corporation that is not an “ineligible corporation” (as defined in Section 1361(b)(2)) and that does not have: (A) more than 100 shareholders; (B) as a shareholder, a person (other than an estate, a trust described in Section 1362(c)(2), or an organization described in Section 1361(c)(6)) who is not an individual; (C) a nonresident alien as a shareholder; or, (D) more than one class of stock. An S corporation must timely file Form 2553, Election by a Small Business Corporation, to make an S election. An entity that does not qualify as a small business corporation pursuant to the requirements above cannot make a valid S election. A QSub is a domestic corporation that is not an ineligible corporation and is 100% owned by an S corporation, and which has a valid QSub election in place. The parent S corporation must timely file Form 8869, Qualified Subchapter S Subsidiary Election, to make a QSub election for an eligible subsidiary. A valid QSub election cannot be made for an ineligible subsidiary. A business with a valid S election may have such status inadvertently terminated by ceasing to continually qualify as a small business corporation. Similarly, an RELIEF FOR INADVERTENTLY INVALID S ELECTIONS, QSUB ELECTIONS, AND TERMINATIONS BY KATIE R. WUNDERLICH & HANNAH FISCHER FREY, BAIRD HOLM LLP 12 Nebraska CPA
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