S corporations generally pay no tax, and income and losses are passed through to shareholders. The permissible number of shareholders is 100, and eligible members of the same family may be treated as a single shareholder. Estates, certain trusts, and tax-exempt organizations may also be shareholders.
S corporations avoid the double taxation inherent in C corporations, but they must follow strict rules. S corporations that were previously C corporations can trigger corporate-level tax in certain situations.
From 2011-2014, the amount of time that an S corporation that converted from a C corporation must hold on to its assets to avoid taxes on any built-in gains at the time of the conversion was shortened to five years. A corporation that meets certain requirements may elect to be taxed as an S corporation, which generally pays no corporate-level tax, unlike a C corporation. In 2015, for corporations that convert from C corporations to S corporations, or S corporations that receive assets under certain conditions from C corporations, there was a corporate-level tax on certain built-in gains of certain assets, with a 10-year recognition period. The Protecting Americans from Tax Hikes Act of 2015 (PATH) permanently extends the reduction of the recognition period for built-in gains tax to five years.
S corporations may own any percentage of the stock of other corporations. Fully owned subsidiaries may also elect "S" status, but the qualified subsidiary is a disregarded entity for tax purposes.
The Protecting Americans from Tax Hikes Act of 2015 (PATH) allows S corporation shareholders to adjust their basis in their stock when the S corporation makes charitable contributions of property using their basis in the property instead of its fair market value.