A notice says the company itself owes tax, and you do not know whether that is even possible. Most of an S corporation's tax is reported to the owners. A notice that talks about tax at the company is a narrower question, and we keep it narrow.
Ask about company taxAn S corporation can owe tax at the entity on certain built-in gains and on excess net passive income. Both depend on facts that are not true of every company that filed an election. A building the company owned on the day the election took effect is a different story from a building it bought years later. Passive receipts are a different story from operating receipts.
The instructions for the year being filed name the recognition period and the tests. We read those instructions for that year. We do not recite a period from memory on a sales page, and we do not hand you a worksheet here. If your notice raises the question, the work happens against your return and those instructions, not against a slogan.
A notice about ordinary income, a late form, or a balance can mention the company and still have nothing to do with built-in gains. The word tax at the top of a page is not a diagnosis. We read the line the notice actually challenges.
Owners also worry that a single rental property flips the whole company into entity tax. Sometimes the passive test is the right question. Often it is not, because wages and active work change the picture. We will not answer it from a one-line note. We will tell you what records would answer it.
A named limit is the picture we want for tax at the company. The year's instructions say what the two doors cover, certain built-in gains and excess net passive income, and a notice about ordinary income stays outside them. We will not stretch the rule until it covers every dollar the company touched. If the line on your notice sits outside those doors, we say so and we send the question back to the ordinary return, with the closed month beside it.
If the notice is outside those two doors, we say so and we send the question back to the ordinary return. If it is inside them, we gather the election year, the asset list from that year, and the income accounts for the year under notice. That is a file, not a hunch.
The books have to show the asset and the income clearly enough to test the question. Netting a contribution against a distribution will not answer a built-in gain, and it will damage the equity lines at the same time. We keep those accounts apart while we read the notice.
Bring the notice and the year. If you know the year the election was accepted, add that. If you only have the form you sent, say that on the acceptance page first. A built-in gain question sits on top of an accepted election, not on top of a hope.
Tell us the year on the notice and whether it mentions built-in gains, passive income, or something you cannot place.