Neal Corporation was initially formed as a C corporation with a calendar year en
ID: 2499695 • Letter: N
Question
Neal Corporation was initially formed as a C corporation with a calendar year end. Neal elected S corporation status, effective January 1, 2012. On December 31, 2011, Neal Corp. reported earnings and profits of $150,000. Beginning in 2012, Neal Corp. reported the following information. Does Neal Corp.'s S election terminate due to excess net passive income? If so, what is the effective date of the terminations?
2012
year gross receipts (including passive investment income) passive investment income corporate earnings and profits (end of year)2012
$400,000 $120,000 $140,000 2013 $300,000 $70,000 $100,000 2014 $500,000 $130,000 $70,000 2015 $400,000 $110,000 $40,000 2016 $600,000 $155,000 $1,000Explanation / Answer
According to IRS, the status S corporation will be termite when the Passive investment income exceeds 25% of Gross receipts for consecutive of three years and have a corporate earnings and Profits. Accordingly, given company have more than 25% passive invest income from 2014 to 2016(Consecutively three years) and have Corporate profits and earnings also. There by, It will lose his S status in 2016 Gross Receipts (1) Passive net Invest Income(2) 3.% in Gross Receipts (2/1*100) Corporate Earrings and profits 2012 4,00,000 1,20,000 30 1,40,000 2013 3,00,000 70,000 23.33 1,00,000 2014 5,00,000 1,30,000 26 70,000 2015 4,00,000 1,10,000 28 40,000 2016 6,00,000 1,55,000 25.83 1,000 ** Neal Corporation S election will terminate due to it have more that 25% passive income on gross receipts for consecutive of three years. ** Year of termination is 2016.
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