A warning for corporations with retained profits that switch to S status:
Too much passive income is bad. If more than 25% of the firm’s gross receipts are received from passive sources…interest, dividends, and any rents and royalties that aren’t derived from an active business…the firm owes a 35% tax on the excess. Companies also can lose S status if the 25% limit is exceeded in three straight years.
Rental income isn’t passive if significant services are provided to the tenants, IRS confirms privately. Here, the company, which owns and leases medical offices, and its agents provide tenant services such as repair and maintenance, landscaping, trash pickup, daily walk-throughs and inspections, window washing, snow removal, pest control and security. Such services make the character of the rents nonpassive.