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MAKING THE BUSINESS ELECTION
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Articles In This Section:· BUSINESS ADVANTAGES AND DISADVANTAGES OF STOCKHOLDER REPORTING OFCORPORATE INCOME
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Income test. You cannot make an election in a company which has gross annual receipts of more than (1) 20 percent from rents, royalties, dividends, interest, annuities, and sales or exchanges of securities. This test bars the election to most corporations earning substantial rental income. Or (2) 80 percent from sources outside of the United States. Watch for these two income tests even if you qualify for the election. Your election is automatically terminated if your company's receipts ever come within the above two tests.
How to make the election. You make an election by filing Form 2553 with the district director of the district in which the corporation files its tax return. You also attach o Form 2553 statements from all of the stockholders consenting to the election. Make sure the form is filed on or before the end of the first calendar month of the taxable year you want the election to be effective. Example: Your corporation reports on a calendar year. You want the election to be effective in 1962. File Form 2553 and the statements of the stockholders' consents on or before January 31, 1962. The earliest you can file these papers is the month before the first calendar month. Here, this is December, 1961. When a new stockholder enters the company, also make sure that he quickly consents to the election. If he doesn't, the election will automatically terminate. Here are the rules: If an election has been made before the first day of the corporation's taxable year, a new shareholder entering the corporation on or before this first day must file his consent not later than the last day of the first calendar month.Example: On December 18, 1961, you elect to report corporate income for 1962. On December 28, 1961, you sell part of your stock to your son. He must consent to the election by January 31, 1962. If he doesn't, your election is not effective. If the new stockholder enters the corporation after the first day of the taxable year for which an election is effective, his consent must be filed within a 30-day period beginning on the date he became a stockholder. Example: Same facts as above except you sell your son stock on January 18, 1962. He must file a consent by February 16, 1962. A late filing loses you the election. To ensure the election, it may be advisable to provide a restrictive clause or agreement which would require new stockholders to consent to the election. The restriction might also be made part of the corporation's charter.
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