Question

Which of the following are required in order for the excess net passive income tax to apply? (check all that apply.)

a. The S corporation previously operated as a C corporation
b. There is accumulated E&P from a prior C corporation at year-end
c. Passive investment income > 25% of gross receipts
d. All of the above are correct

Answer 1

The excess net passive income tax applies to an S corporation when it previously operated as a C corporation, has accumulated E&P from a former C corporation at year-end, and when passive investment income is greater than 25% of gross receipts. All listed conditions are required for the tax to apply.

Step-by-step explanation:

The correct answer is d. All of the above are correct:

The excess net passive income tax applies to an S corporation under certain conditions. Specifically, the tax is relevant when all of the following criteria are met:

• The S corporation previously operated as a C corporation,
• There is accumulated earnings and profits (E&P) from a prior C corporation at year-end,
• Passive investment income exceeds 25% of the corporation's gross receipts.

An S corporation that meets these requirements will be subject to the excess net passive income tax, which can have significant implications for the taxation of the corporation's income. Understanding these rules is critical for tax planning and compliance for S corporations transitioning from C corporation status or those with accumulated E&P. The intent behind this tax is to discourage S corporations from generating passive income and to ensure that income which can be attributed to the former C corporation’s retained earnings is taxed at double tax regime rates.