Excess Net Passive Income Tax S Corporation

Excess net passive income built in gains lifo recapture tax.

Excess net passive income tax s corporation. This is a corporate level tax on an s corporation earned passive income. The tax is calculated on the excess net passive income. Excess net passive income tax if an s corporation previously operated as a c corporation and has accumulated earnings and profits at the end of the year from a prior c corporation year it may be subject to the excess net passive income tax. To avoid the imposition of the section 1375 tax and the potential loss of s corporation status many s corporations distribute their accumulated earnings and profits at the.

If an s corporation has 1 accumulated earnings and profits at the close of such taxable year and 2 gross receipts more than 25 percent of which are passive investment income then there is a tax that is charged on the income of the s corporation. Keep in mind however that the s corporation election will still terminate if passive investment income exceeds 25 of gross receipts for three. Excess net passive income. Excess net passive income is a corporate level tax on the passive income earned by an s corporation.

The threshold for the enpi calculation is triggered when gross enpi is greater than 25 of gross receipts and the corporation has e p at year end. Excess net passive income tax. The excess net passive income that is subject to the tax is limited to the taxable income calculated as if it were still a c corporation. The excess net passive income tax applies to s corporations that were previously c corporations or have been restructured as a tax free company from their status as a c corporation.

Excess net passive income tax applies to an s corporation if. The corporation has accumulated earnings and profits at the close of its tax year the corporation has passive investment income for the tax year the corporation has excess net passive income. Excess net passive income enpi tax computation. Also the passive income tax calculated using the lesser of excessive net passive income or taxable income.

For more information see section 1362 paragraph d 3 c of the internal revenue code. It is a tax on the company s passive income which includes interest income annuities rents royalties and dividends. This is not a problem if the s corporation has no accumulated e p. By reducing taxable income the s corporation is able to minimize the passive income tax.

53 congress created this tax to encourage s corporations to distribute their accumulated earnings and profits from prior c corporation years. Even worse for an unsuspecting s corporation irc section 1375 provides for a tax on the excess net passive income computed at the highest corporate income tax rate of 35. However if it does have both e p and excess passive investment income some of the excess net passive investment income may be subject to tax at the highest corporate income tax rate currently 35 thus the sting.