Passive Investment Income Tax S Corporation

You are not subject to self employment tax but you may have to pay net investment income tax in some instances.

Passive investment income tax s corporation. The excess net passive income tax and the lifo recapture tax apply only when an s corporation was previously a taxable c corporation or if the s corporation went through a tax free reorganization with a c corporation. Let s review the taxation of corporate investment income. S corporations are responsible for paying three taxes at the corporate level. It has accumulated earnings and profits e p at the close of the tax year.

Passive income is revenue from activities in which the s corporation did not materially participate. This includes portfolio income from schedule k which is considered as passive income for s corporations. In 2018 the company earned 100 000 of passive investment income. It is not automatically earned income or passive income.

This risk occurs when an s corporation has prior accumulated earnings and profits at the close of three consecutive tax years and when passive investment income exceeds 25 of gross receipts see irc section 1362 d 3 a i. If an s corporation has income earnings for the year no more than 25 percent of its gross receipts for the year may be generated by passive income. If more than that comes from passive income the. A corporation must pay the enpi tax if all the following apply.

In 2019 the company will earn 500 000 of active business income. Excess net passive income tax. An s corporation can lose its taxfavored s status if it fails to carefully monitor passive rental income. As long as the s corporation generates a profit a passive shareholder pays taxes on her share of the income in the normal way possibly paying the net investment income tax in addition.

It has passive investment income for the tax year that is in excess of 25 of gross receipts. If the s corporation also has excess passive investment income generally gross passive investment income that exceeds 25 of its gross receipts it might be liable for the tax on excess net passive investment income under irc 1375. There are no graduated tax rates for corporate investment income. The corporate tax rate on investment income is usually higher than the highest personal marginal tax rate and exceeds 50 per.

Excess net passive income the lifo recapture tax and built in gains tax. Corporate investment income is taxed as passive income at flat rates that vary by province.