This week’s interview on Financial Insider Weekly is with attorney Bernard Vogel III of the Silicon Valley Law Group. Our interview subject is "Choices of forms for doing business."
Since the 35% federal penalty tax on excessive passive investment income and threat of termination of the S election only apply when the S corporation has undistributed C corporation earnings and profits, these issues can be eliminated by distributing those earnings and profits. The distribution can be "deemed" to be made without making a distribution of cash or assets by election of the S corporation's shareholders. A low 15% federal tax currently applies to these distibutions, scheduled to increase to up to 43.4% after 2012.
Although S corporations have some disadvantages compared to partnerships and limited liability companies, they also have some important advantages.
2010 might be the last chance for S corporations to make a special election that may protect their status as S corporations and the related tax benefits.