What is a Disqualified S-Corporation?

There’s No Such Thing as a Disqualified S Corporation

Luckily, S corporation disqualification is more of an urban legend than fact. In 2010, Congress attempted to pass a measure that would have disqualified some S corporations, primarily small businesses, from using S corp tax structures when filing. The measure failed, but nonetheless many business owners worry about the potential for disqualification in the future. Misinformation has led some to believe that it is possible to lose S corporation status for obscure reasons.

But What If You Fail to Meet S Corporation Requirements?

If you fail to meet the proper requirements for an S corporation, it’s more likely due to an issue with your S corp filing or business structure than with anything else. S corp filing must be completed accurately and in compliance with legal regulations to obtain proper consideration as a corporation. If you need help ensuring your documents are complete and filed properly, GovDocFiling can work with you to verify and double-check your information prior to submitting. Other than that, you must make sure that the setup of your business meets the standards to qualify as an S corp.

Get Your S Corporation Application Right

To prevent potential rejection of your S corporation application, you can make use of our online EIN application form. The form acts as a wizard to guide you through the process and ensure your information is complete, accurate, and in compliance with legal S corp filing requirements. Don’t turn an urban legend into your reality. Make sure you have the right resources, tools, and advice to file for your S corp today.

An S-Corporation is a closely held corporation, in some cases a partnership or a limited liability corporation, that chooses to be taxed under Chapter 1, Subchapter S of the IRS’s Tax Code. S-Corporations do not pay federal income taxes. Rather, their profits and losses are divided among shareholders who then report the income or loss on their individual tax returns.

In the past decade, the Federal Government has addressed but ultimately not (yet) passed legislation that could disqualify some S-Corporations, forcing them to pay payroll and other taxes. This legislation has been opposed by most S-Corporations.

Under the legislation proposed in 2010, certain types of S-Corporations would have been disqualified. These include one-professional corporations, such as independent contractors who currently can file as an S-Corporation and save a significant amount on employment taxes.

Additionally, under the legislation proposed in 2010, an individual who is a partner in a firm that provides professional services, such as a dentist, the partner’s share of the firm’s profits is subject to employment taxes. Because the partner’s profits come from an S-Corporation, however, they are subject to a lower tax rate. Disqualifying the S-Corporation would force shareholders to pay a much higher employment tax rate.

It is important to note that under the proposed legislation many S-Corporations would remain intact. For example, S-Corporations that sell products, such as advertising, would be able to retain S-Corporation status and save on self-employment and payroll taxes under the 2010 proposed legislation. Likewise, S-Corporations that offer non-professional services, such as barbers, electricians and plumbers would retain their S-Corporation status.

Understanding the history of proposals to disqualify some S-Corporations is important because it’s likely that similar proposals could come up again. If you need assistance filing as an S-Corporation, contact GovDocFiling here.

Is it possible to be disqualified as an S corporation? Just the idea can be terrifying. You’ve put in work to file your S corporation, obtain your S corp EIN number, and establish your business as a legal operating entity, only for an obscure loophole to disqualify your business from S corporation status and taxation. But how is that possible?

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