IRS Publication 542 — Corporations

The rules used to determine whether a business is taxed as a corporation changed for businesses formed after 1996.

Business formed before 1997. A business formed before 1997 and taxed as a corporation under the old rules will generally continue to be taxed as a corporation. 510 538 544 550 925 946 2 Publication 542 (1-2024)

Business formed after 1996. The following businesses formed after 1996 are taxed as corporations.

• A business formed under a federal or state law that refers to it as a corporation, body corporate, or body politic.

• A business formed under a state law that refers to it as a joint-stock company or joint-stock association.

• An insurance company.

• Certain banks.

• A business wholly owned by a state or local government.

• A business specifically required to be taxed as a corporation by the Internal Revenue Code (for example, certain publicly traded partnerships).

• Certain foreign businesses.

• Any other business that elects to be taxed as a corporation. Limited liability company (LLC). An LLC may be classified for federal income tax purposes as either a partnership, a corporation, or an entity disregarded as an entity separate from its owner by applying the rules in Treasury Regulations section 301. 7701-3. An LLC can elect to be treated as an association taxable as a corporation by filing Form 8832, Entity Classification Election. See the Instructions for Form 8832. For more information about LLCs, see Pub. 3402, Taxation of Limited Liability Companies. S corporations. Some corporations may meet the qualifications for electing to be S corporations. For information on S corporations, see the Instructions for Form 1120-S. Personal service corporations. A corporation is a personal service corporation if it meets all of the following requirements.

1. Its principal activity during the “testing period” is performing personal services (defined later). Generally, the testing period for any tax year is the prior tax year. If the corporation has just been formed, the testing period begins on the first day of its tax year and ends on the earlier of: a. The last day of its tax year, or b. The last day of the calendar year in which its tax year begins.

2. Its employee-owners substantially perform the services in (1) above. This requirement is met if more than 20% of the corporation's compensation cost for its activities of performing personal services during the testing period is for personal services performed by employee-owners.

3. Its employee-owners own more than 10% of the fair market value of its outstanding stock on the last day of the testing period.

Personal services. Personal services include any activity performed in the fields of accounting, actuarial science, architecture, consulting, engineering, health (including veterinary services), law, and the performing arts.