Question

YesMan was organized as a valid S corporation from its inception. During the last four years, virtually all of YesMan's income is passive investment income. When did YesMan's S election involuntarily terminate?

Answer 1

YesMan's S election involuntarily terminated at the end of the third consecutive year when it exceeded 25% of its gross receipts.

Step-by-step explanation:

According to the Internal Revenue Service (IRS), an S corporation typically maintains its status as long as it meets certain requirements related to ownership and income. However, if an S corporation generates passive investment income for three consecutive years, and it exceeds 25% of its gross receipts during each of those years, its S election will involuntarily terminate.

In the case of YesMan, where virtually all of its income is passive investment income for the last four years, we can conclude that YesMan's S election involuntarily terminated at the end of the third consecutive year when it exceeded 25% of its gross receipts.

It is important to note that the primary purpose of an S corporation is to allow small businesses to avoid double taxation by passing their income and losses through to their shareholders' personal tax returns. When an S election terminates, the corporation reverts to being taxed as a C corporation, subjecting it to potential double taxation.