This fifth installment of my multi-part series on Subchapter S is focused on married individuals who own shares of an S corporation. While the rules relating to shareholder eligibility seem straightforward, their application relative to spouses may create traps for unwary taxpayers and their tax advisers.
BACKGROUND
Number of Shareholders Limitation
Prior to 1996, an S corporation could have no more than 35 shareholders. The Small Business Job Protection Act of 1996 (“SBJPA”) amended Code Section 1361(b)(1)(A), increasing the maximum number of permitted shareholders of an S corporation to 75. In 2004, Congress enacted the American Jobs Creation Act (“AJCA”). The AJCA further amended Code Section 1361(b)(1)(A), increasing the maximum number of permitted shareholders of an S corporation to 100. This change was effective for tax years beginning in 2005. Today, the maximum number of permitted shareholders of an S corporation remains at 100.