Question

Which of the following are required for termination of an S corporation election due to excess passive investment income?

1) The corporation must have excess passive investment income for three consecutive years.
2) The corporation must have passive investment income that exceeds 25% of its gross receipts for three consecutive years.
3) The corporation must have made a valid election to be treated as an S corporation.
4) The corporation must have filed Form 1120S, U.S. Income Tax Return for an S Corporation, for each year it was an S corporation.

Answer 1

Termination of an S corporation election due to excess passive investment income requires meeting specific conditions including filing Form 1120S for each year as an S corporation.

Step-by-step explanation:

Termination of an S corporation election due to excess passive investment income requires several conditions to be met:

1. The corporation must have passive investment income that exceeds 25% of its gross receipts for three consecutive years.
2. The corporation must have passive investment income that exceeds 25% of its gross receipts for the last three taxable years.
3. The corporation must have a passive investment income ratio of at least 60% for each of those three years.
4. The corporation must have filed Form 1120S, U.S. Income Tax Return for an S Corporation, for each year it was an S corporation.

Meeting all these requirements will result in the termination of an S corporation election due to excess passive investment income.