Q: Tax Playa, I am the sole owner of my corporation. What are the rules for this type of corporation?
Terrence, Arlington VA
A: This is known as a "closely-held" corporation. By itself, this is not particularly-limiting (unless the corporation defaults into a qualified personal service corporation). That being said, there are two restrictions on these type of corporations...
For more information on this topic, see IRS Publication 542, Corporations, as well as IRS Publication 15B, Employer Guide to Fringe Benefits.
A "closely-held corporation" is one in which more than 50% of the outstanding stock is held by five or fewer individuals (including related persons, estates, etc.). It also cannot be a personal service corporation, which has its own set of rules.
If a corporation is closely-held, there are several restrictions placed upon it:
1. The At-Risk and Passive Loss Rules Apply. This means that losses are restricted and may need to be rolled over to future years. The "at risk" rules limit the loss to the amount of property the corporation has at risk. The passive loss rules disallow net losses from passive activities like rental of property.
2. Limits on Accrual Based Accounting. A closely-held corporation that uses accrual-based accounting (where expenses and income are incurred when they are owed, not paid) can only deduct business expenses to a cash-basis owner when that owner recognizes the income.
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