SEE - Special Enrollment Exam Quiz: S Corporation Eligibility And Elections
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S Corporation Eligibility And ElectionsQuestion 1 of 15

Which of the following is correct regarding the timing of an S corporation election?

An existing calendar-year corporation may make a timely S election for 2025 by filing Form 2553 after March 15, 2025, if all shareholders consent and the corporation has not yet begun business.
A newly formed corporation whose first taxable year begins July 1, 2025, must file Form 2553 no later than September 15, 2025, to make a timely election for its first tax year.
A corporation may make an S election for the current tax year at any time before the due date, including extensions, of its income tax return for that year.
An S election filed during the tax year immediately preceding the first tax year is effective on the first day of that preceding tax year.
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SEE - Special Enrollment Exam Quiz

SEE - Special Enrollment Exam Quiz: S Corporation Eligibility And Elections

Practice S Corporation Eligibility And Elections in SEE - Special Enrollment Exam with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

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This quiz focuses on S Corporation Eligibility And Elections, giving you a quick way to practice the rules, question types, and explanations that matter most for SEE - Special Enrollment Exam.

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Question 1

Which of the following is correct regarding the timing of an S corporation election?

  1. An existing calendar-year corporation may make a timely S election for 2025 by filing Form 2553 after March 15, 2025, if all shareholders consent and the corporation has not yet begun business.
  2. A newly formed corporation whose first taxable year begins July 1, 2025, must file Form 2553 no later than September 15, 2025, to make a timely election for its first tax year. (correct answer)
  3. A corporation may make an S election for the current tax year at any time before the due date, including extensions, of its income tax return for that year.
  4. An S election filed during the tax year immediately preceding the first tax year is effective on the first day of that preceding tax year.
Explanation: Under IRC § 1362(b)(1) and the Form 2553 instructions, an S election may be made during the tax year immediately preceding the tax year for which it is to be effective or, if made during that tax year, no later than the 15th day of the third month of that tax year. A newly formed corporation has no preceding tax year, so its timely first-year election must be made by the 15th day of the third month of its first tax year. For a first tax year beginning July 1, 2025, that deadline is September 15, 2025, so Choice B is correct. Choice A is incorrect because an existing calendar-year corporation that files after March 15, 2025, has missed the statutory current-year election deadline; later filing is not made 'timely' by shareholder consent or lack of business operations. Choice C is incorrect because the current-year election deadline is not the return due date (including extensions). Choice D is incorrect because an election filed during the preceding tax year takes effect for the following tax year, not the preceding year.

Question 2

On March 3, 2025, a shareholder of Sterling, Inc., an S corporation, sold 1,000 shares to NorthPeak Partners, a partnership. Sterling's officers did not learn of the sale until September 2025. As soon as it learned, Sterling required the shareholder to repurchase the shares from NorthPeak, and Sterling wants the IRS to treat the S election as continuing.

Which statement is correct regarding Sterling's S corporation status?

  1. The S election did not terminate because the transfer was corrected before the end of Sterling's 2025 tax year, so the election continues and no request for IRS relief under IRC §1362(f) is needed.
  2. The S election terminated on March 3, 2025, but the IRS may waive the termination under IRC §1362(f) if the termination was inadvertent and Sterling and its shareholders request relief and agree to required adjustments. (correct answer)
  3. The S election terminated in September 2025, when Sterling first learned of the partnership's ownership, rather than on the date of the transfer, because the termination is not effective until the corporation discovers the disqualifying event.
  4. The S election terminated on March 3, 2025, and the IRS has no authority to waive the termination because a partnership is not an eligible S corporation shareholder under IRC §1361(b)(1)(B).
Explanation: Governing authority: IRC §1361(b)(1)(B); IRC §1362(d)(2); IRC §1362(f). A partnership cannot be an S corporation shareholder, so the disqualifying transfer terminated the S election on March 3, 2025. Under §1362(f), the IRS may treat the termination as inadvertent and allow the election to continue if the corporation promptly took steps to restore eligibility and the corporation and shareholders agree to the IRS's required adjustments; the facts show Sterling promptly required a repurchase. Choice B is correct. Choice A is wrong because correcting the transfer within the same tax year does not automatically preserve S status; §1362(f) relief is still required. Choice C is wrong because the termination took effect on the date of the transfer, not when Sterling learned of it. Choice D is wrong because the IRS has authority to grant inadvertent-termination relief even though a partnership is an ineligible shareholder.

Question 3

Crestview Corporation, a calendar-year domestic corporation in existence since 2020, had 94 shareholders at the beginning of 2025, all of them United States citizens. On January 15, 2025, Crestview issued 10 shares to a consulting partnership as compensation for services. On March 1, 2025, the partnership sold those shares to an unrelated United States citizen, leaving Crestview with 95 shareholders. On April 2, 2025, Crestview filed Form 2553, with consents from all 95 shareholders, intending the election to be effective for the 2025 tax year. Crestview's tax preparer had advised the company that the filing deadline was April 15, and Crestview relied on that advice.

Based on these facts, which of the following is correct regarding Crestview's S corporation election?

  1. The election is effective for 2025 because Crestview reasonably relied on its tax preparer's advice, and the IRS grants relief for late S elections filed within 3 years and 75 days of the due date.
  2. The election cannot be effective for 2025 because the partnership was an ineligible shareholder and the Form 2553 was filed late; the election becomes effective for the 2026 tax year. (correct answer)
  3. The election is effective for 2025 because the partnership sold its stock before the Form 2553 was filed, so Crestview met all eligibility requirements on the date of the election.
  4. The election is invalid, and Crestview must wait five years before making a new S election because a partnership held stock during the 2025 tax year.
Explanation: IRC § 1362(b)(1) and (3): an S election filed after the 15th day of the third month of the tax year is treated as made for the following tax year; for a calendar-year corporation, the 2025 deadline was March 17 (March 15 fell on a Saturday). IRC § 1361(b)(1): a partnership is not a permitted shareholder of a small business corporation. Crestview's Form 2553 was filed April 2, 2025 — late for 2025 — and a partnership held Crestview stock from January 15 to March 1, 2025, so Crestview was not a small business corporation for 2025. Late-election relief under Rev. Proc. 2013-30 is unavailable because that relief applies only when the corporation fails to qualify solely because the election was untimely; the ineligible shareholder is an independent disqualifying factor. The election is therefore effective for 2026, the first year for which the filing was timely and the corporation was eligible. Choice A is wrong because late-election relief cannot cure an independent eligibility failure. Choice C is wrong because eligibility is not tested only on the filing date. Choice D is wrong because no election was in effect for 2025, so there was no termination and the five-year re-election bar of IRC § 1362(g) does not apply.

Question 4

Juniper, Inc., is an S corporation in 2025. To raise capital, it proposes to issue a small block of its stock to one of several prospective investors. All existing shareholders consent to any transfer that would not terminate the S election.

Which prospective transferee would cause Juniper's S election to terminate if the stock were issued to it?

  1. The estate of a deceased U.S. citizen.
  2. A domestic single-member limited liability company wholly owned by a U.S. citizen and disregarded as an entity separate from its owner for federal income tax purposes.
  3. A charitable organization described in IRC §501(c)(3).
  4. A revocable trust created by, and treated as owned by, a nonresident alien individual. (correct answer)
Explanation: Governing authority: IRC §1361(b)(1)(B), IRC §1361(c)(2), and IRC §1361(c)(6). S corporation stock may be owned by individuals who are U.S. citizens or residents, estates, certain trusts, and certain tax-exempt organizations. A grantor trust is eligible only when the deemed owner is a U.S. citizen or resident; the revocable trust owned by a nonresident alien fails that requirement, so Choice D is correct. Choice A is incorrect because an estate is an eligible shareholder. Choice B is incorrect because a disregarded single-member LLC is not the shareholder for federal tax purposes; its U.S. citizen owner is treated as the shareholder. Choice C is incorrect because a §501(c)(3) charitable organization is permitted as an S shareholder under §1361(c)(6).

Question 5

For 2025, a calendar-year domestic corporation wants to elect S status. Its outstanding instruments are: 1,000 shares of voting common stock and 500 shares of nonvoting common stock, with identical dividend and liquidation rights; 100 shares of nonvoting preferred stock that has a $10 per share liquidation preference over the common stock and a fixed dividend preference; and a $100,000 written promissory note issued to an individual shareholder that is an unconditional promise to pay a sum certain, bears a fixed interest rate, is not convertible into stock, and otherwise meets the straight-debt safe harbor.

For purposes of the one-class-of-stock requirement, how many classes of stock does the corporation have?

  1. 1
  2. 2 (correct answer)
  3. 3
  4. 4
Explanation: Under IRC §1361(b)(1)(D) and Treas. Reg. §1.1361-1(l)(1), a corporation has one class of stock only if all outstanding shares have identical rights to distributions and liquidation proceeds; differences in voting rights alone do not create a second class. The voting and nonvoting common stock are therefore one class. The preferred stock is a second class because its liquidation preference and dividend preference give it different distribution and liquidation rights. The promissory note is not stock: it qualifies as straight debt under IRC §1361(c)(5)(B), so it is not counted. Thus the corporation has 2 classes. Choice A (1) ignores the preferred stock. Choice C (3) treats the voting and nonvoting common as separate classes. Choice D (4) also treats the straight-debt note as a class of stock.

Question 6

A calendar-year S corporation whose election had been in effect since 2018 had its election revoked timely on March 1, 2024, by shareholders holding 600 of its 1,000 outstanding shares. Because the revocation was made on or before March 15, 2024, it was effective January 1, 2024. The corporation has not requested or received IRS consent to a new election.

What is the first taxable year for which the corporation may make a new S corporation election?

  1. 2028
  2. 2029 (correct answer)
  3. 2030
  4. 2031
Explanation: Under IRC §1362(d)(1), the revocation was effective for the 2024 tax year because it was made on or before March 15, 2024. Under IRC §1362(g), a corporation may not make a new S election before the 5th taxable year that begins after the first taxable year for which the termination was effective. Taxable years beginning after 2024 are 2025 (1st), 2026 (2nd), 2027 (3rd), 2028 (4th), and 2029 (5th). Therefore 2029 is the earliest year for a new election. Choice A (2028) is one year too early. Choice C (2030) would be correct only if the corporation also had to wait out the entire fifth year (2029) before re-electing. Choice D (2031) overstates the waiting period further.

Question 7

For 2025, a calendar-year domestic corporation that has never been an S corporation wants to elect S status. It has a single class of stock outstanding. Its shares are owned as follows: 96 unrelated U.S. citizen individuals each own shares; a married couple, both U.S. citizens, own shares separately; a grantor trust whose only owner is one of the 96 individuals owns shares and is treated as owned by that individual for federal income tax purposes; a qualified subchapter S trust (QSST) has one current beneficiary, a U.S. citizen, and satisfies all QSST requirements; and an electing small business trust (ESBT) has two potential current beneficiaries, both U.S. citizens, and satisfies all ESBT requirements. All individuals described are unrelated to one another, except that the married couple are spouses. The QSST beneficiary and the two ESBT beneficiaries are not otherwise counted above.

For purposes of the 100-shareholder limit, how many shareholders does the corporation have?

  1. 97
  2. 98
  3. 99
  4. 100 (correct answer)
Explanation: IRC §1361(b)(1)(A) limits an S corporation to 100 shareholders, and the counting rules in IRC §1361(c) apply. Because the facts state that all individuals described are unrelated except the married couple, the family aggregation rule in IRC §1361(c)(1) does not reduce the count beyond the spousal rule. A husband and wife are treated as one shareholder, so the married couple count as 1. A grantor trust is not counted separately; its owner is the shareholder, and that owner is already included among the 96. The current beneficiary of a QSST is counted as the shareholder, and each potential current beneficiary of an ESBT is counted. Thus the count is 96 + 1 + 0 + 1 + 2 = 100. Choice A (97) omits the QSST beneficiary and the two ESBT beneficiaries. Choice B (98) counts the QSST beneficiary but omits the two ESBT beneficiaries. Choice C (99) counts the ESBT as one shareholder rather than counting its two potential current beneficiaries.

Question 8

Elm, Inc., is a domestic corporation that wants to elect S corporation status for 2025. Sixty of Elm's shareholders are members of a single family: all are lineal descendants of a common ancestor within six generations, or spouses of those descendants. The remaining 50 shareholders are unrelated, unmarried individuals. Elm has voting common stock and nonvoting common stock outstanding. The nonvoting shares are identical to the voting shares in their rights to distributions and to assets on liquidation, but they have no voting rights. All shareholders are U.S. citizens or resident aliens.

Which statement is correct regarding Elm's eligibility to elect S corporation status?

  1. No, because Elm has more than 100 shareholders and the nonvoting shares create a second class of stock.
  2. No, because family members must each be counted separately for the 100-shareholder limit, and Elm has 110 shareholders.
  3. Yes, because the family members are treated as one shareholder, and the voting-only difference does not create a second class of stock. (correct answer)
  4. Yes, because all family members and the 50 unrelated shareholders may be treated as one shareholder group if they file a single Form 2553 consent.
Explanation: Governing authority: IRC §1361(b)(1), IRC §1361(c)(1), and IRC §1361(c)(4). Under §1361(c)(1), all members of a family within the six-generation limit are treated as one shareholder for the 100-shareholder test. The 60 family members therefore count as one shareholder, and the 50 unrelated shareholders count separately, for a total of 51. Under §1361(c)(4), stock that differs only in voting rights is not treated as a second class of stock if the shares have identical rights to distributions and liquidation proceeds. Choice C is correct. Choice A incorrectly counts family members individually and treats voting differences as a second class. Choice B also counts family members individually. Choice D is wrong because unrelated shareholders cannot be aggregated with family members merely by filing a single consent.

Question 9

Marta, a U.S. citizen, was the sole shareholder of Marin Manufacturing, an S corporation. Marta died in September 2025. Under her will, all of her stock passes to her brother Klaus, who lives in Germany and has never been a U.S. citizen or resident. The estate is still being administered, and the executor has asked whether the corporation's S election remains valid.

Which of the following statements is correct?

  1. The estate may hold the stock for the remainder of its administration, but the S election will terminate on the day the stock is distributed to Klaus. (correct answer)
  2. The S election terminates immediately upon Marta's death because an estate is not a permitted S corporation shareholder and cannot continue a deceased shareholder's election.
  3. The estate may distribute the stock to Klaus, and the S election will remain in effect for two years after the distribution before it terminates.
  4. The executor must file Form 8869 with the IRS within two months and fifteen days of Marta's death to elect qualified subchapter S trust treatment for the estate.
Explanation: Authority: IRC §1361(b)(1)(B) (estates are permitted shareholders), IRC §1361(b)(1)(C) (a nonresident alien may not be a shareholder), and IRC §1362(d)(2) (termination is effective on the day the corporation ceases to be a small business corporation). Choice A is correct: an estate is an eligible shareholder for the duration of administration, so Marta's death does not terminate the election; the decisive event is the later distribution of the stock to Klaus, a nonresident alien, which makes the corporation cease to qualify on the distribution date. Choice B is wrong because estates are expressly permitted shareholders. Choice C is wrong because the two-year grace period applies to certain trusts after the grantor's death (IRC §1361(c)(2)(A)(ii)) and to testamentary trusts, not to nonresident alien individuals. Choice D is wrong because Form 8869 is used for the qualified subchapter S subsidiary election, and no election is required for an estate to hold S corporation stock.

Question 10

Which of the following is correct regarding trusts as shareholders of an S corporation for 2025?

  1. An electing small business trust (ESBT) may have a nonresident alien as a potential current beneficiary. (correct answer)
  2. A trust that was a grantor trust immediately before the death of its deemed owner may continue to be treated as an S corporation shareholder only for the 60-day period beginning on the day of the deemed owner's death.
  3. A qualified subchapter S trust (QSST) election is made by the trust's current income beneficiary and must be made before the trust receives the S corporation stock.
  4. A voting trust may hold S corporation stock only if each beneficiary of the voting trust also makes a separate QSST election.
Explanation: IRC § 1361(c)(2). Under § 1361(c)(2)(B)(v), as amended by the TCJA for tax years beginning after 2017, the nonresident alien prohibition of § 1361(b)(1)(C) does not apply to the potential current beneficiaries of an ESBT, so an ESBT may have a nonresident alien as a potential current beneficiary. Choice A is correct. Choice B misstates the period: under § 1361(c)(2)(A)(ii), a trust that was a grantor trust immediately before the deemed owner's death may remain an eligible shareholder for the two-year period beginning on the day of the death. Choice C misstates the timing: the current income beneficiary makes the QSST election, but it may be made within the 2-month-and-16-day period beginning when the stock is transferred to the trust, not only before. Choice D is wrong because a voting trust is itself a permitted S corporation shareholder under § 1361(c)(2)(A)(iv); no QSST election is required.

Question 11

Which of the following is correct regarding an election to treat a subsidiary as a qualified subchapter S subsidiary (QSub)?

  1. The election is made on Form 8869 by the subsidiary corporation, with the parent S corporation's consent, and is effective as of the date of the subsidiary's formation.
  2. The election is made on Form 2553 by the parent S corporation and is effective only if the subsidiary is a domestic corporation wholly owned by the parent.
  3. The election may be made on Form 8869 if the parent S corporation owns at least 80% of the subsidiary's stock and all other shareholders are eligible to own S corporation stock.
  4. The election is made on Form 8869 by the parent S corporation for a domestic corporation that it wholly owns, and the QSub is generally disregarded as a separate entity for federal tax purposes. (correct answer)
Explanation: Under IRC § 1361(b)(3)(B) and the Form 8869 instructions, a QSub election is made by the parent S corporation on Form 8869 for a domestic corporation that it wholly owns; the QSub is generally disregarded as a separate entity for federal tax purposes; Choice D is correct. Choice A names the wrong party and makes an incorrect automatic effective-date assumption. Choice B names the wrong form. Choice C is wrong because QSub status requires 100% ownership by the parent, not 80% ownership with eligible minority shareholders.

Question 12

Delta, Inc., is a calendar-year domestic corporation that has been in existence since 2018 and has filed as a C corporation. It has 75 eligible shareholders and one class of stock. On March 20, 2025, all shareholders signed a Form 2553 electing S corporation status effective January 1, 2025. The IRS received the Form 2553 on March 24, 2025. Delta has not requested any relief for a late election.

What is the earliest tax year for which Delta's S corporation election can be effective?

  1. 2025, because the election was made during the 2025 tax year and all shareholders consented before the 2025 return was due.
  2. 2026, because the Form 2553 was filed after the 15th day of the third month of Delta's 2025 tax year and is treated as made for the next tax year. (correct answer)
  3. 2025, because the Form 2553 was filed before the end of Delta's 2025 tax year and before the first Form 1120-S would be due.
  4. The election is invalid, because a C corporation that files Form 2553 after the 15th day of the third month of the tax year cannot make an S election.
Explanation: Governing authority: IRC §1362(b). For a calendar-year corporation, an S election for 2025 had to be filed by the 15th day of the third month of the tax year; because March 15, 2025, fell on a Saturday, the deadline was March 17, 2025 (IRC §7503). An election filed after that date during the same tax year is treated as made for the following tax year. Because the IRS received Delta's Form 2553 on March 24, 2025, and Delta did not request late-election relief, the earliest effective date is January 1, 2026. Choice B is correct. Choice A ignores the statutory deadline and the following-year rule. Choice C confuses the S election deadline with the tax return filing deadline. Choice D is wrong because a late election is not invalid; it takes effect in the next tax year.

Question 13

Cedar Corporation has been an S corporation since 2018 and has accumulated earnings and profits of $300,000 remaining from its years as a C corporation. In each of 2022, 2023, and 2024, more than 25% of Cedar's gross receipts were passive investment income. In all years before 2022, Cedar's passive investment income was below 25% of gross receipts. In December 2024, before year-end, Cedar distributed $300,000 to its shareholders, reducing its accumulated earnings and profits to zero at the close of 2024. Cedar's passive investment income in 2025 was well below 25% of gross receipts.

Which of the following statements is correct regarding Cedar's S election?

  1. The S election terminated effective January 1, 2025, because Cedar had passive investment income in excess of 25% of its gross receipts for three consecutive tax years.
  2. The S election was not terminated because Cedar had no accumulated earnings and profits at the close of 2024, so it did not satisfy the three-year requirement for termination. (correct answer)
  3. The S election was not terminated, but Cedar became subject to the tax on excess net passive income for 2025 because of the dividend distribution made in December 2024.
  4. The S election terminated effective January 1, 2026, because the three-consecutive-year test is measured over the tax years ending with the year in which the distribution is made.
Explanation: Authority: IRC §1362(d)(3)(A) (passive investment income termination requires both accumulated earnings and profits at the close of each of three consecutive tax years and gross receipts more than 25% passive in each of those years; the termination is effective on the first day of the following tax year). The decisive condition is the year-end earnings and profits requirement. Because Cedar distributed all of its accumulated earnings and profits before the close of 2024, it had no accumulated earnings and profits at the close of 2024, so the three-year test was not met and the election did not terminate. Choice A ignores the earnings and profits condition and the effect of the December 2024 distribution. Choice C is wrong because the excess net passive income tax under IRC §1375 applies only when the corporation has accumulated earnings and profits at the close of a tax year and excess passive income for that year; no such tax arises in 2025 on these facts. Choice D misstates both the measurement period and the effective date of a passive income termination.

Question 14

Which of the following is correct regarding the termination of an S corporation election?

  1. If an S corporation ceases to be a small business corporation, the election terminates on the date the disqualifying event occurs and, absent IRS consent, the corporation cannot make a new S election for five years. (correct answer)
  2. If an S corporation ceases to be a small business corporation because stock is transferred to a nonresident alien, the election terminates retroactively to the beginning of the tax year.
  3. If a corporation ceases to be a small business corporation because of an ineligible shareholder, the termination is effective on the last day of the tax year unless the shareholder disposes of the stock by the due date of the return.
  4. A termination caused by an ineligible shareholder is effective on the date the IRS issues a determination that the corporation no longer qualifies.
Explanation: Under IRC § 1362(d)(2), when a corporation ceases to be a small business corporation, the S election terminates on the date the disqualifying event occurs; under IRC § 1362(g), absent IRS consent, a new S election cannot be made for five years; Choice A is correct. Choice B wrongly makes the termination retroactive to the beginning of the tax year. Choice C wrongly delays the effective date to year-end and makes it depend on a later stock disposition. Choice D is wrong because the termination is automatic on the disqualifying event, not on IRS determination.

Question 15

Which of the following is correct regarding the one-class-of-stock requirement for S corporation eligibility?

  1. For the S corporation one-class-of-stock requirement, a corporation has two classes of stock if its outstanding shares differ in voting rights, even when the shares have identical rights to distributions and liquidation proceeds.
  2. A shareholder loan is treated as a second class of stock unless each shareholder holds the loan in the same proportion as the shareholder's stock ownership.
  3. A corporation has one class of stock when all outstanding shares have identical rights to distributions and liquidation proceeds, and a qualifying straight debt instrument is not a second class of stock. (correct answer)
  4. For S corporation eligibility, any shareholder debt is a second class of stock unless the debt matures within five years of issuance.
Explanation: Under Treas. Reg. § 1.1361-1(l)(1) and IRC § 1361(b)(1)(D), a corporation has one class of stock if all outstanding shares confer identical rights to distribution and liquidation proceeds, and differences in voting rights are permitted; Choice C is correct. Choice A misstates the voting-rights rule. Choice B is wrong because the straight debt safe harbor under IRC § 1361(c)(5) does not require proportionate holdings by shareholders. Choice D is wrong because straight debt has no five-year maturity requirement; it must satisfy the statutory definition in § 1361(c)(5).