An S corporation is subject to a variety of taxes. For example, an S corporation may be subject to a tax on excess net passive income if an S corporation has pre-S corporation earnings and profits and its passive investment income is more than 25% of its gross receipts. The S corporation’s status will be terminated if passive investment income is more than 25% of gross receipts for 3 consecutive tax years and the corporation had pre-S corporation earnings and profit at the end of each of those tax years.
Gross receipts from royalties, rents, dividends, interest and annuities would be classified as passive investment income. Net passive income is passive income reduced by deductions directly connected with the production of passive investment income. The tax code is very complex and it is advised that any business owner faced with any of the circumstances mentioned above should get a tax professional involved to make sure there are no problems in any of these areas.
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