S Corp shareholder eligibility for ITIN holders

In business and taxation, an intriguing question often arises: Can an Individual Taxpayer Identification Number (ITIN) holder be an S Corporation shareholder? Understanding the intricacies of S Corp eligibility for ITIN holders can shed light on the potential opportunities and limitations for these individuals.

In this article, I’ll delve into the factors that determine whether an ITIN holder can participate as an S Corp shareholder; I’ll also cover the considerations to keep in mind when exploring this topic with your clients.

What is an ITIN? 

An ITIN is a tax processing number primarily used by specific non-resident and resident aliens, their spouses, and dependents who are ineligible to obtain a Social Security number (SSN) in order to comply with U.S. tax laws. The ITIN enables the IRS to efficiently process tax returns and payments made by these individuals.

Visit this section on the IRS site to learn more about a ITIN and its various applications. In addition, you and your clients can take advantage of the IRS interactive tool to verify eligibility for obtaining an ITIN.

Although the ITIN number shares the format of a 9-digit number with an SSN, that is where their similarities end:

• ITINs do not grant authorization for employment in the United States.
• They do not provide eligibility for Social Security benefits.
• You cannot claim the earned income credit using your ITIN.

How to obtain an ITIN number

Your clients must complete Form W-7, Application for Individual Taxpayer Identification Number, in conjunction with a tax return, unless your clients meet an exception to the tax filing requirement.

S Corps and their requirements

An S Corp is established as a pass-through entity where shareholders are individually taxed for the income, losses, deductions, and credits attributed to the corporation. This taxation occurs on their personal tax returns at their individual tax rates. Opting for a S Corp status is advantageous because it avoids double taxation, a feature that is not present in C Corporations.

Visit this section on the IRS site to learn more about forming an S Corp. To gain S Corp status, there are a few requirements:

• Submit Form 2553, Election by a Small Business Corporation, to the IRS.
• Status is only eligible only for U.S. corporations; foreign corporations cannot make the S election.
• To qualify as an Individual, you must be a U.S. citizen or a U.S. resident; certain trusts and estates are also eligible.
• You must have no more than 100 shareholders.
• You must maintain only one class of stock.

Navigating S Corp eligibility for ITIN holders

ITIN holders who are nonresident aliens are not eligible to be part of an S Corp because it contradicts S Corp regulations. However, if they transition to becoming resident aliens, they will become eligible. It is crucial for individuals contemplating this option to be aware of the differing processes between the Immigration and Naturalization Service and the IRS, and consult their lawyers to confirm that their visa permits involvement in such an arrangement.

Here’s what you need to know

An ITIN holder who qualifies as a U.S. resident can establish an S Corp, provided they meet all other S Corp requirements. However, the individual’s eligibility to participate in an S Corp might be influenced by the specific type of visa they used to enter the United States.

Navigating the complexities of business structures and immigration regulations is vital to make informed decisions. Seeking professional advice from tax professionals like you can help ITIN holders confidently pursue their entrepreneurial aspirations, while adhering to the legal framework governing their visa status and business endeavors.

Editor’s note: This article was previously published by the CPA Practice Advisor.