S-Corp Shares and Losing S-Corp Election

Q. If my client donates shares of an S-corp to Fidelity Charitable, will it cause the S-corp to lost its S election?

A. No. After changes to the Internal Revenue Code in 1996 in the Small Business Job Protection Act, certain tax-exempt organizations, including Fidelity Charitable, are permitted shareholders of an S corporation. Prior to this change in the 1996 Act, charitable organizations were not permitted shareholders, so that a transfer to an ineligible shareholder would cause the corporation to lose its qualification as an S corporation. The change in the 1996 Act was a welcome change to many small businesses and their shareholders, and permitted significantly greater flexibility in planning charitable giving.


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