S Corporation
A corporation that elects pass-through taxation so income flows to shareholders, generally avoiding entity-level tax.
REG loves the eligibility checklist: a valid S election requires a domestic corporation with no more than 100 shareholders, only individuals, estates, and certain trusts (no C corporations, partnerships, or nonresident aliens), and one class of stock (differing voting rights are fine — not a second class). The classic “tell” quietly slips in an ineligible shareholder or a second class of stock — the answer hinges on the election being terminated or never valid. Timing rule: an election filed by the 15th day of the third month is retroactive to year-start.
The trap is conflating S-corp and partnership basis math. S shareholders do NOT add entity-level debt to stock basis (only direct shareholder loans create debt basis — a mere personal guarantee doesn’t), while partners do increase basis for their share of partnership liabilities. Distinguish too from corporate taxation: an S corp avoids the double taxation that hits C corporations, yet can still owe built-in gains (BIG) tax (21% rate, 5-year recognition period) after a C-to-S conversion. Memory hook: “100, 1 class, 1 country” = shareholder cap, single stock class, domestic requirement.
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