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NY Form Instructions 2553: What You Should Know

The rules for the determination of whether a small business corporation should be treated as a federal S corporation are designed so that certain taxpayers—known as “qualified small business taxpayers” (SBS)—will be entitled to treat S corporations as their own separate entities for tax purposes. The rules are designed to eliminate the need for a separate election that is needed when corporations are treated as a single taxpayer for federal income tax purposes because a single entity will also qualify for the reduced rates of tax under Sec. 1201 for small businesses and small business interests. An S corporation can qualify for these reduced rates of tax under Sec. 1201 by electing to be treated as an entity separate and distinct from a state resident and controlled by the taxpayer. If an S corporation wishes to elect to be described as a foreign-source income taxpayer with respect to income or profits arising in the United States, it must elect separately in its federal income tax return. The following table lists the minimum requirements for an S corporation that will qualify to be treated as a USB. Qualifying small business taxpayers who wish to be treated as SBS must elect on Schedule K-1 (Form 1040) for tax year ending December 31 of the last year in which the S corporation had qualifying income in excess of 5,000. Qualifying S corporation shareholders who are individuals and do not have shareholders of a C corporation in the same family living with them throughout the year can elect to be treated as SBS for the calendar year in which they hold 100% of the stock in their S corporation. They don't need to do so if the S corporation satisfies the other requirements for SBS. Form 2665, Foreign Base Company Election for Qualifying Small Business Persons To Make Qualifying Foreign Dividends Available to Shareholders in New York For the calendar year of the stock option granted and the portion of the tax year after December 31 in which a qualifying foreign corporation was a USB, the following rules apply. If the taxpayer (other than a corporation, partnership or trust) elected to be treated as a USB, in the following steps it will qualify: It must elect to be treated as a foreign corporation. A foreign corporation is a foreign corporation for federal income tax purposes only if it is a foreign corporation with respect to the relevant taxing year, and it meets all the following tests.

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