Tax Planning and Considerations: S Corporation Targets

May 2022

The following article, Tax planning and considerations: S corporation targets, originally appeared in the May 2022 issue of The Tax Adviser.
 

S Corporations

Merger-and-acquisition (M&A) activities have not slowed down during the past few years, including during the COVID-19 pandemic. From government lockdowns to labor shortages, rising inflation, and other events, the pandemic has taken a toll on businesses. M&A markets, however, have continued to thrive as long as the price and, ultimately, the structure is right. S corporations have been a popular entity choice for closely held and operated small businesses and, more importantly, have been targets in many M&A transactions both pre- and post-COVID-19.
 
A “small business corporation” can elect S corporation status for federal income tax purposes. Sec.1361(b) defines a small business corporation as a domestic eligible corporation that does not have more than 100 shareholders, any shareholders that are not individuals (except for certain trusts, estates, and exempt organizations), or shareholders who are nonresident aliens. Additionally, the corporation cannot have more than one class of stock. When a small business corporation chooses to become an S corporation for federal income tax purposes, it must file an election with the IRS using Form 2553, Election by a Small Business Corporation.