Question

Excess passive investment income for the purposes of the termination of an S corporation election is when passive income is greater than

a. When passive income exceeds 25% of gross receipts for three consecutive years
b. When passive income surpasses 35% of gross receipts for two consecutive years
c. When passive income exceeds 50% of gross receipts for one year
d. When passive income is greater than 20% of gross receipts for three consecutive years

Answer 1

An S corporation's election may be terminated when passive income exceeds 25% of gross receipts for three consecutive years.

Step-by-step explanation:

An S corporation's election may be terminated when passive income exceeds 25% of gross receipts for three consecutive years.Excess passive investment income for the purposes of the termination of an S corporation election occurs when passive income exceeds a specific threshold of gross receipts over a period of time.

The correct situation under which an S corporation's election can be terminated on these grounds is a. when passive income exceeds 25% of gross receipts for three consecutive years. This rule is meant to prevent corporations with relatively little active business income from benefiting indefinitely from the S corporation tax advantages, which are designed for active businesses rather than passive investment entities.