Sub-Chapter S Election

This checklist should be used only as a guide.

A corporation is allowed to make an S election only if, with respect to that corporation, all of the following questions can be answered affirmatively:

1. Does the corporation meet the federal income tax definition of a corporation?
2. Is the corporation organized in the U.S. or under the laws of the U.S. or any state or territory?
3. Does the corporation avoid classification as any of the following:
   • A domestic international sales corporation (DISC) or former DISC
   • A corporation which has a possessions tax credit election in effect
   • A bank or domestic building and loan association or an insurance company
4. Does the corporation have no more than 75 shareholders (counting husband and wife as one shareholder)?
5. Are all shareholders either individuals (none of whom are nonresident aliens), estates or certain kinds of trusts?
6. Does the corporation have only one class of stock, taking into account that so-called “debt” may sometimes be reclassified as a second class of stock, and that non pro rata distributions may sometimes create a second class of stock?
7. Is the corporation’s taxable year, or does the corporation intend to adopt, one of the following:
   • A calendar year
   • A year for which the corporation establishes a business purpose
   • A “grandfathered” fiscal year
   • A 52/53 week year ending with reference to the last day of December
   • An elective non-permitted fiscal year with respect to which a corporation makes required payments

For a corporation’s first taxable year beginning after 1996, the rules relating to questions 3, 4, and 6 are modified as follows:

3. Banks and other financial institutions are eligible to be S corporations unless they use the reserve method of accounting for bad debts, and a new type of trust (electing small business trusts) can be a shareholder.

4. The maximum number of shareholders is 75.

6. S corporations are no longer prohibited from owning 80% or more of the stock of another corporation.