C corporations with retained profits that switch to S status must be careful. Too much passive income can draw a 35% tax. If over 25% of gross receipts is received from passive sources… interest, dividends, and any rents and royalties that aren’t derived from an active business…the company owes a 35% tax on the excess. S status can be lost if the 25% limit is exceeded in three straight years. Rental income isn’t passive if the S corporation provides significant services or incurs substantial costs in the rental business, IRS confirms in a private ruling. An S firm owns and leases farm property to tenants to plant and cultivate crops. It shares in farming costs, furnishes materials for building maintenance and repair, and is responsible for the crop plan. Such management services and expenditures make the character of the rents the S corporation gets from its tenants nonpassive. Spouses who co-own a business together may elect to file two Schedule Cs with their joint return instead of having to prepare a separate partnership return. To qualify, both spouses must materially participate and report income and expenses on separate Schedule Cs based on their ownership stakes. This way, married co-owners can each get their own credit for purposes of Social Security and Medicare coverage. Note that husband and wife owners of an LLC or limited partnership don’t qualify.