Fei Zhao, CPA, has published his article in the AICPA Tax Adviser, New rule on nonresident aliens in an S corporation. The Abstract is as follows:
The new tax law provides a way to avoid the unexpected termination of the S election when a nonresident alien becomes a potential current beneficiary of an electing small business trust (ESBT) or a deemed owner of a grantor trust that elects to be an ESBT.
The Article begins as follows:
One requirement for an S corporation is that it cannot have a nonresident alien as a shareholder (Sec. 1361(b)(1)(C)). This requirement seems easy to apply; however, when it comes to an eligible small business trust (ESBT), unforeseeable situations may unexpectedly terminate the S election — such as when a nonresident alien becomes a potential current beneficiary of an ESBT or a deemed owner of a grantor trust that elects to be an ESBT. The law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, provides a way to avoid the unexpected termination of the S election when one of these situations arises.
Sec. 7701(b)(1)(B) defines a nonresident alien as an individual who is neither a citizen nor a resident of the United States within the meaning of Sec. 7701(b)(1)(A). Sec. 7701(b)(1)(A) provides that an alien individual is treated as a resident of the United States with respect to any calendar year if (and only if) that individual either (1) is a lawful permanent resident of the United States at any time during that calendar year (the green card test); (2) meets the substantial-presence test of Sec. 7701(b)(3); or (3) makes the first-year election provided in Sec. 7701(b)(4).
An ESBT is one of the few trusts that qualifies as an S corporation shareholder. An ESBT allows multiple beneficiaries and the accumulation of income, which can facilitate families’ financial planning. To be an eligible S corporation shareholder, the ESBT must be a domestic trust that (1) does not have as a beneficiary any person other than an individual, an estate, or certain exempt organizations; and (2) no interest in the trust was acquired by purchase. The trustee also must have made a valid ESBT election for the trust (Secs. 1361(c)(2)(A)(v) and 1361(e)).
Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal.