2021 US Code
Title 26 - Internal Revenue Code
Subtitle A - Income Taxes
Chapter 1 - Normal Taxes and Surtaxes
Subchapter S - Tax Treatment of S Corporations and Their Shareholders
Part I - In General
Sec. 1362 - Election; revocation; termination
| 26 U.S.C. § 1362 (2021) |
| §1362. Election; revocation; termination |
|
(a) Election
(1) In general
Except as provided in subsection (g), a small business corporation may elect, in accordance with the provisions of this section, to be an S corporation. An election under this subsection shall be valid only if all persons who are shareholders in such corporation on the day on which such election is made consent to such election. An election under subsection (a) may be made by a small business corporation for any taxable year— (A) at any time during the preceding taxable year, or (B) at any time during the taxable year and on or before the 15th day of the 3d month of the taxable year. If— (A) an election under subsection (a) is made for any taxable year during such year and on or before the 15th day of the 3d month of such year, but (B) either— (i) on 1 or more days in such taxable year before the day on which the election was made the corporation did not meet the requirements of subsection (b) of section 1361, or (ii) 1 or more of the persons who held stock in the corporation during such taxable year and before the election was made did not consent to the election, then such election shall be treated as made for the following taxable year. If— (A) a small business corporation makes an election under subsection (a) for any taxable year, and (B) such election is made after the 15th day of the 3d month of the taxable year and on or before the 15th day of the 3rd month of the following taxable year, then such election shall be treated as made for the following taxable year. For purposes of this subsection, an election for a taxable year made not later than 2 months and 15 days after the first day of the taxable year shall be treated as timely made during such year. If— (A) an election under subsection (a) is made for any taxable year (determined without regard to paragraph (3)) after the date prescribed by this subsection for making such election for such taxable year or no such election is made for any taxable year, and (B) the Secretary determines that there was reasonable cause for the failure to timely make such election, the Secretary may treat such an election as timely made for such taxable year (and paragraph (3) shall not apply). An election under subsection (a) shall be effective for the taxable year of the corporation for which it is made and for all succeeding taxable years of the corporation, until such election is terminated under subsection (d). (d) Termination (1) By revocation (A) In generalAn election under subsection (a) may be terminated by revocation. An election may be revoked only if shareholders holding more than one-half of the shares of stock of the corporation on the day on which the revocation is made consent to the revocation. Except as provided in subparagraph (D)— (i) a revocation made during the taxable year and on or before the 15th day of the 3d month thereof shall be effective on the 1st day of such taxable year, and (ii) a revocation made during the taxable year but after such 15th day shall be effective on the 1st day of the following taxable year. If the revocation specifies a date for revocation which is on or after the day on which the revocation is made, the revocation shall be effective on and after the date so specified. An election under subsection (a) shall be terminated whenever (at any time on or after the 1st day of the 1st taxable year for which the corporation is an S corporation) such corporation ceases to be a small business corporation. Any termination under this paragraph shall be effective on and after the date of cessation. An election under subsection (a) shall be terminated whenever the corporation— (I) has accumulated earnings and profits at the close of each of 3 consecutive taxable years, and (II) has gross receipts for each of such taxable years more than 25 percent of which are passive investment income. Any termination under this paragraph shall be effective on and after the first day of the first taxable year beginning after the third consecutive taxable year referred to in clause (i). A prior taxable year shall not be taken into account under clause (i) unless the corporation was an S corporation for such taxable year. For purposes of this paragraph— (i) in the case of dispositions of capital assets (other than stock and securities), gross receipts from such dispositions shall be taken into account only to the extent of the capital gain net income therefrom, and (ii) in the case of sales or exchanges of stock or securities, gross receipts shall be taken into account only to the extent of the gains therefrom. Except as otherwise provided in this subparagraph, the term "passive investment income" means gross receipts derived from royalties, rents, dividends, interest, and annuities. The term "passive investment income" shall not include interest on any obligation acquired in the ordinary course of the corporation's trade or business from its sale of property described in section 1221(a)(1). If the S corporation meets the requirements of section 542(c)(6) for the taxable year, the term "passive investment income" shall not include gross receipts for the taxable year which are derived directly from the active and regular conduct of a lending or finance business (as defined in section 542(d)(1)). If an S corporation holds stock in a C corporation meeting the requirements of section 1504(a)(2), the term "passive investment income" shall not include dividends from such C corporation to the extent such dividends are attributable to the earnings and profits of such C corporation derived from the active conduct of a trade or business. In the case of a bank (as defined in section 581) or a depository institution holding company (as defined in section 3(w)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1813(w)(1))), the term "passive investment income" shall not include— (I) interest income earned by such bank or company, or (II) dividends on assets required to be held by such bank or company, including stock in the Federal Reserve Bank, the Federal Home Loan Bank, or the Federal Agricultural Mortgage Bank or participation certificates issued by a Federal Intermediate Credit Bank. In the case of an S termination year, for purposes of this title— The portion of such year ending before the 1st day for which the termination is effective shall be treated as a short taxable year for which the corporation is an S corporation. The portion of such year beginning on such 1st day shall be treated as a short taxable year for which the corporation is a C corporation. Except as provided in paragraph (3) and subparagraphs (C) and (D) of paragraph (6), the determination of which items are to be taken into account for each of the short taxable years referred to in paragraph (1) shall be made— (A) first by determining for the S termination year— (i) the amount of each of the items of income, loss, deduction, or credit described in section 1366(a)(1)(A), and (ii) the amount of the nonseparately computed income or loss, and (B) then by assigning an equal portion of each amount determined under subparagraph (A) to each day of the S termination year. A corporation may elect to have paragraph (2) not apply. An election under this subsection shall be valid only if all persons who are shareholders in the corporation at any time during the S short year and all persons who are shareholders in the corporation on the first day of the C short year consent to such election. For purposes of this subsection, the term "S termination year" means any taxable year of a corporation (determined without regard to this subsection) in which a termination of an election made under subsection (a) takes effect (other than on the 1st day thereof). The taxable income for the short year described in subparagraph (B) of paragraph (1) shall be placed on an annual basis by multiplying the taxable income for such short year by the number of days in the S termination year and by dividing the result by the number of days in the short year. The tax shall be the same part of the tax computed on the annual basis as the number of days in such short year is of the number of days in the S termination year. Subsection (d) of section 443 shall apply to the short taxable year described in subparagraph (B) of paragraph (1). For purposes of this title— The short taxable year described in subparagraph (A) of paragraph (1) shall not be taken into account for purposes of determining the number of taxable years to which any item may be carried back or carried forward by the corporation. The due date for filing the return for the short taxable year described in subparagraph (A) of paragraph (1) shall be the same as the due date for filing the return for the short taxable year described in subparagraph (B) of paragraph (1) (including extensions thereof). Paragraph (2) shall not apply with respect to any item resulting from the application of section 338. Paragraph (2) shall not apply to an S termination year if there is a sale or exchange of 50 percent or more of the stock in such corporation during such year. If— (1) an election under subsection (a) or section 1361(b)(3)(B)(ii) by any corporation— (A) was not effective for the taxable year for which made (determined without regard to subsection (b)(2)) by reason of a failure to meet the requirements of section 1361(b) or to obtain shareholder consents, or (B) was terminated under paragraph (2) or (3) of subsection (d) or section 1361(b)(3)(C), (2) the Secretary determines that the circumstances resulting in such ineffectiveness or termination were inadvertent, (3) no later than a reasonable period of time after discovery of the circumstances resulting in such ineffectiveness or termination, steps were taken— (A) so that the corporation for which the election was made or the termination occurred is a small business corporation or a qualified subchapter S subsidiary, as the case may be, or (B) to acquire the required shareholder consents, and (4) the corporation for which the election was made or the termination occurred, and each person who was a shareholder in such corporation at any time during the period specified pursuant to this subsection, agrees to make such adjustments (consistent with the treatment of such corporation as an S corporation or a qualified subchapter S subsidiary, as the case may be) as may be required by the Secretary with respect to such period, then, notwithstanding the circumstances resulting in such ineffectiveness or termination, such corporation shall be treated as an S corporation or a qualified subchapter S subsidiary, as the case may be, during the period specified by the Secretary. (g) Election after terminationIf a small business corporation has made an election under subsection (a) and if such election has been terminated under subsection (d), such corporation (and any successor corporation) shall not be eligible to make an election under subsection (a) for any taxable year before its 5th taxable year which begins after the 1st taxable year for which such termination is effective, unless the Secretary consents to such election. |
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(Added Pub. L. 97–354, §2, Oct. 19, 1982, 96 Stat. 1672; amended Pub. L. 98–369, div. A, title I, §102(d)(2), title VII, §721(g), (h), (l), (t), July 18, 1984, 98 Stat. 623, 968, 969, 971; Pub. L. 100–647, title I, §§1006(f)(6), 1007(g)(9), Nov. 10, 1988, 102 Stat. 3406, 3435; Pub. L. 104–188, title I, §§1305(a), (b), 1308(c), 1311(b)(1), Aug. 20, 1996, 110 Stat. 1779, 1780, 1783, 1784; Pub. L. 106–170, title V, §532(c)(2)(T), Dec. 17, 1999, 113 Stat. 1931; Pub. L. 108–357, title II, §§231(b), 237(a), 238(a), Oct. 22, 2004, 118 Stat. 1433, 1436; Pub. L. 109–135, title IV, §413(b), Dec. 21, 2005, 119 Stat. 2641; Pub. L. 110–28, title VIII, §8231(a), May 25, 2007, 121 Stat. 196; Pub. L. 110–172, §11(a)(25), Dec. 29, 2007, 121 Stat. 2487; Pub. L. 113–295, div. A, title II, §221(a)(88), Dec. 19, 2014, 128 Stat. 4050; Pub. L. 115–141, div. U, title IV, §401(a)(190), (191), Mar. 23, 2018, 132 Stat. 1193.) |
| EDITORIAL NOTES
AMENDMENTS
2018—Subsec. (d)(3)(C)(v). Pub. L. 115–141, §401(a)(190), substituted "1813(w)(1)))," for "1813(w)(1))," in introductory provisions. Subsec. (f). Pub. L. 115–141, §401(a)(191), substituted "may be, during" for "may be during" in concluding provisions. 2014—Subsec. (d)(3)(A)(iii). Pub. L. 113–295 substituted "unless the corporation was an S corporation for such taxable year." for "unless— "(I) such taxable year began after December 31, 1981, and "(II) the corporation was an S corporation for such taxable year." 2007—Subsec. (d)(3)(B) to (F). Pub. L. 110–28 added subpars. (B) and (C) and struck out former subpar. (B), which related to gross receipts from dispositions of capital assets (other than stock and securities) being taken into account only to the extent of the capital gain net income therefrom, subpar. (C), which defined passive investment income, subpar. (D), which provided that, in the case of any options dealer or commodities dealer, passive investment income was to be determined by not taking into account any gain or loss from any section 1256 contract or property related to such a contract, subpar. (E), which related to certain dividends not being treated as passive investment income if an S corporation held stock in a C corporation meeting the requirements of section 1504(a)(2), and subpar. (F), which related to the exception from passive investment income for banks and depository institution holding companies. Subsec. (f)(1). Pub. L. 110–172 substituted "or section 1361(b)(3)(B)(ii)" for ", section 1361(b)(3)(B)(ii), or section 1361(c)(1)(A)(ii)" in introductory provisions and "or section 1361(b)(3)(C)" for ", section 1361(b)(3)(C), or section 1361(c)(1)(D)(iii)" in subpar. (B). 2005—Subsec. (d)(3)(F). Pub. L. 109–135 substituted "a depository institution holding company (as defined in section 3(w)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1813(w)(1))" for "a bank holding company (within the meaning of section 2(a) of the Bank Holding Company Act of 1956 (12 U.S.C. 1841(a))), or a financial holding company (within the meaning of section 2(p) of such Act)". 2004—Subsec. (d)(3)(F). Pub. L. 108–357, §237(a), added subpar. (F). Subsec. (f). Pub. L. 108–357, §238(a)(5), inserted "or a qualified subchapter S subsidiary, as the case may be" after "S corporation" in concluding provisions. Subsec. (f)(1). Pub. L. 108–357, §238(a)(1), inserted ", section 1361(b)(3)(B)(ii)," after "subsection (a)" in introductory provisions. Pub. L. 108–357, §231(b)(1), inserted "or section 1361(c)(1)(A)(ii)" after "section 1361(b)(3)(B)(ii)," in introductory provisions. Subsec. (f)(1)(B). Pub. L. 108–357, §238(a)(2), inserted ", section 1361(b)(3)(C)," after "subsection (d)". Pub. L. 108–357, §231(b)(2), inserted "or section 1361(c)(1)(D)(iii)" after "section 1361(b)(3)(C),". Subsec. (f)(3)(A). Pub. L. 108–357, §238(a)(3), amended subpar. (A) generally. Prior to amendment, subpar. (A) read as follows: "so that the corporation is a small business corporation, or". Subsec. (f)(4). Pub. L. 108–357, §238(a)(4), amended par. (4) generally. Prior to amendment, par. (4) read as follows: "the corporation, and each person who was a shareholder in the corporation at any time during the period specified pursuant to this subsection, agrees to make such adjustments (consistent with the treatment of the corporation as an S corporation) as may be required by the Secretary with respect to such period,". 1999—Subsec. (d)(3)(C)(ii). Pub. L. 106–170 substituted "section 1221(a)(1)" for "section 1221(1)". 1996—Subsec. (b)(5). Pub. L. 104–188, §1305(b), added par. (5). Subsec. (d)(3). Pub. L. 104–188, §1311(b)(1)(A), in heading substituted "accumulated" for "subchapter C". Subsec. (d)(3)(A)(i)(I). Pub. L. 104–188, §1311(b)(1)(B), substituted "accumulated" for "subchapter C". Subsec. (d)(3)(B) to (E). Pub. L. 104–188, §1311(b)(1)(C), redesignated subpars. (C) to (F) as (B) to (E), respectively, and struck out former subpar. (B) which read as follows: "(B) Subchapter c earnings and profits.—For purposes of subparagraph (A), the term 'subchapter C earnings and profits' means earnings and profits of any corporation for any taxable year with respect to which an election under section 1362(a) (or under section 1372 of prior law) was not in effect." Subsec. (d)(3)(F). Pub. L. 104–188, §1311(b)(1)(C), redesignated subpar. (F) as (E). Pub. L. 104–188, §1308(c), added subpar. (F). Subsec. (f). Pub. L. 104–188, §1305(a), amended subsec. (f) generally. Prior to amendment, subsec. (f) read as follows: "(f) Inadvertent Terminations.—If— "(1) an election under subsection (a) by any corporation was terminated under paragraph (2) or (3) of subsection (d), "(2) the Secretary determines that the termination was inadvertent, "(3) no later than a reasonable period of time after discovery of the event resulting in such termination, steps were taken so that the corporation is once more a small business corporation, and "(4) the corporation, and each person who was a shareholder of the corporation at any time during the period specified pursuant to this subsection, agrees to make such adjustments (consistent with the treatment of the corporation as an S corporation) as may be required by the Secretary with respect to such period, then, notwithstanding the terminating event, such corporation shall be treated as continuing to be an S corporation during the period specified by the Secretary." 1988—Subsec. (d)(3)(D)(v). Pub. L. 100–647, §1006(f)(6)(A), struck out cl. (v) which related to special rule for options and commodities dealers. Subsec. (d)(3)(E). Pub. L. 100–647, §1006(f)(6)(B), added subpar. (E). Subsec. (e)(5)(B). Pub. L. 100–647, §1007(g)(9), substituted "Subsection (d)" for "Subsection (d)(2)". 1984—Subsec. (b)(3)(B). Pub. L. 98–369, §721(l)(2), substituted "on or before the 15th day of the 3rd month of the following taxable year" for "on or before the last day of such taxable year". Subsec. (b)(4). Pub. L. 98–369, §721(l)(1), added par. (4). Subsec. (d)(3)(D)(v). Pub. L. 98–369, §102(d)(2), added cl. (v). Subsec. (e)(2). Pub. L. 98–369, §721(g)(2), substituted "as provided in paragraph (3) and subparagraphs (C) and (D) of paragraph (6)" for "as provided in paragraph (3)". Subsec. (e)(3)(B). Pub. L. 98–369, §721(h), struck out "All" in heading, and substituted "subsection" for "paragraph" and "S short year and all persons who are shareholders in the corporation on the first day of the C short year" for "S termination year" in text. Subsec. (e)(6)(C). Pub. L. 98–369, §721(g)(1), added subpar. (C). Subsec. (e)(6)(D). Pub. L. 98–369, §721(t), added subpar. (D). STATUTORY NOTES AND RELATED SUBSIDIARIES EFFECTIVE DATE OF 2014 AMENDMENT Amendment by Pub. L. 113–295 effective Dec. 19, 2014, subject to a savings provision, see section 221(b) of Pub. L. 113–295, set out as a note under section 1 of this title. EFFECTIVE DATE OF 2007 AMENDMENTPub. L. 110–28, title VIII, §8231(b), May 25, 2007, 121 Stat. 197, provided that: "The amendments made by this section [amending this section] shall apply to taxable years beginning after the date of the enactment of this Act [May 25, 2007]." EFFECTIVE DATE OF 2005 AMENDMENTAmendment by Pub. L. 109–135 effective as if included in the provision of the American Jobs Creation Act of 2004, Pub. L. 108–357, to which such amendment relates, see section 413(d) of Pub. L. 109–135, set out as a note under section 1361 of this title. EFFECTIVE DATE OF 2004 AMENDMENTPub. L. 108–357, title II, §231(c)(2), Oct. 22, 2004, 118 Stat. 1434, provided that: "The amendments made by subsection (b) [amending this section] shall apply to elections and terminations made after December 31, 2004." Pub. L. 108–357, title II, §237(b), Oct. 22, 2004, 118 Stat. 1436, provided that: "The amendment made by this section [amending this section] shall apply to taxable years beginning after December 31, 2004." Pub. L. 108–357, title II, §238(b), Oct. 22, 2004, 118 Stat. 1436, provided that: "The amendments made by this section [amending this section] shall apply to elections made and terminations made after December 31, 2004." EFFECTIVE DATE OF 1999 AMENDMENTAmendment by Pub. L. 106–170 applicable to any instrument held, acquired, or entered into, any transaction entered into, and supplies held or acquired on or after Dec. 17, 1999, see section 532(d) of Pub. L. 106–170, set out as a note under section 170 of this title. EFFECTIVE DATE OF 1996 AMENDMENTPub. L. 104–188, title I, §1305(c), Aug. 20, 1996, 110 Stat. 1780, provided that: "The amendments made by subsections (a) and (b) [amending this section] shall apply with respect to elections for taxable years beginning after December 31, 1982." Amendment by sections 1308(c) and 1311(b)(1) of Pub. L. 104–188 applicable to taxable years beginning after Dec. 31, 1996, see section 1317(a) of Pub. L. 104–188, set out as a note under section 641 of this title. EFFECTIVE DATE OF 1988 AMENDMENTAmendment by Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title. EFFECTIVE DATE OF 1984 AMENDMENTAmendment by section 102(d)(2) of Pub. L. 98–369 applicable to positions established after July 18, 1984, in taxable years ending after that date except as otherwise provided, see section 102(f), (g) of Pub. L. 98–369, set out as a note under section 1256 of this title. Amendment by section 721(g), (h), (l), (t) of Pub. L. 98–369 effective as if included in the Subchapter S Revision Act of 1982, Pub. L. 97–354, except that amendment by section 721(g)(1) is not applicable to certain qualified stock purchases, amendment by section 721(l) is applicable to any election under this section (or any corresponding provision of prior law) made after Oct. 19, 1982, and amendment by section 721(t) is not applicable to certain S termination years, see section 721(y) of Pub. L. 98–369, set out as a note under section 1361 of this title. EFFECTIVE DATESection applicable to taxable years beginning after Dec. 31, 1982, except that in the case of a taxable year beginning during 1982, subsec. (d)(3) of this section and sections 1366(f)(3) and 1375 of this title shall apply, and section 1372(e)(5) of this title as in effect on the day before Oct. 19, 1982, shall not apply, see section 6(a), (b)(3) of Pub. L. 97–354, set out as a note under section 1361 of this title. For additional provisions relating to the treatment of certain elections under prior law for purposes of subsec. (g) of this section, see section 6(e) of Pub. L. 97–354, set out as a note under section 1361 of this title. TREATMENT OF CERTAIN ELECTIONS UNDER PRIOR LAWPub. L. 104–188, title I, §1317(b), Aug. 20, 1996, 110 Stat. 1787, provided that: "For purposes of section 1362(g) of the Internal Revenue Code of 1986 (relating to election after termination), any termination under section 1362(d) of such Code in a taxable year beginning before January 1, 1997, shall not be taken into account." SUBCHAPTER S ELECTIONPub. L. 98–369, div. A, title I, §102(d)(3), July 18, 1984, 98 Stat. 623, as amended by Pub. L. 99–514, §2, title XVIII, §1808(a)(2), Oct. 22, 1986, 100 Stat. 2095, 2817, provided that: "If a commodities dealer or an options dealer— "(A) becomes a small business corporation (as defined in section 1361(b) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954]) at any time before the close of the 75th day after the date of the enactment of this Act [July 18, 1984], and "(B) makes the election under section 1362(a) of such Code before the close of such 75th day, then such dealer shall be treated as having received approval for and adopted a taxable year beginning on the first day during 1984 on which it was a small business corporation (as so defined) or such other day as may be permitted under regulations and ending on the date determined under section 1378 of such Code and such election shall be effective for such taxable year." |
| United States Code, 2018 Edition, Supplement 3, Title 26 - INTERNAL REVENUE CODE |
| Bills and Statutes |
| United States Code |
| Y 1.2/5: |
| Title 26 - INTERNAL REVENUE CODE Subtitle A - Income Taxes CHAPTER 1 - NORMAL TAXES AND SURTAXES Subchapter S - Tax Treatment of S Corporations and Their Shareholders PART I - IN GENERAL Sec. 1362 - Election; revocation; termination |
| section 1362 |
| 2021 |
| January 3, 2022 |
| No |
| standard |
| 96 Stat. 1672 98 Stat. 623 100 Stat. 2095 102 Stat. 3406 110 Stat. 1779, 1780, 1787 113 Stat. 1931 118 Stat. 1433, 1434, 1436 119 Stat. 2641 121 Stat. 2487, 197 128 Stat. 4050 132 Stat. 1193 |
| Public Law 97-354, Public Law 98-369, Public Law 99-514, Public Law 100-647, Public Law 104-188, Public Law 106-170, Public Law 108-357, Public Law 109-135, Public Law 110-28, Public Law 110-172, Public Law 113-295, Public Law 115-141 |
