S Corporations: New Opportunities for Rental Activities?

Journal of Accountancy, March 1993 | Go to article overview

S Corporations: New Opportunities for Rental Activities?


In the past, regular or C corporations were prevented from converting to S status if their plimary activity was renting real estate and they had accumulated earnings and profits as C corporations. Earlier proposed IRS regulations held rentals from offices and apartment buildings would be considered passive, triggering the 34% tax of section 1362 at the S level on rentals in excess of 25% of the gross receipts. Further, maintaining this status for three years forced reversion to C or regular status at the beginning of the fourth year.

Now, in a surprising turn, the final regulations say rents are not passive if derived in the active trade or business of renting property. Rental activities will be considered active if the S corporation either provides significant services or incurs substantial costs in the rental business (regulations section 1. 1362-2(c)(5)(ii)(B)(2)).

The regulations provide no clear line for determining whether the S corporation has provided significant services or incurred substantial costs. …

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