Tax
§1377(a)(2) Closing of Books Election
Quick definition
S-corp election to allocate income based on actual activity rather than pro-rata.
When an S-corporation shareholder terminates their interest (dies, sells, etc.) during the tax year, §1377(a)(2) allows the corporation to elect to 'close the books' as of the termination date. Income allocated to the departing shareholder = actual income up to termination. Without the election, income is allocated pro-rata based on days owned. Useful when income is uneven through the year. Requires consent of all affected shareholders. Different from §754 (which doesn't apply to S-corps).
Related tax terms
R&D Tax Credit
Federal credit for qualified research expenses, usable against payroll tax by startups.
Delaware Franchise Tax
Annual tax for Delaware corporations, often quoted wildly too high if calculated incorrectly.
Nexus (Sales Tax)
The connection with a state that triggers a tax-collection obligation.
QSBS (Qualified Small Business Stock)
Tax exemption for gains on qualifying startup stock held 5+ years.
Frequently asked questions
- What is §1377(a)(2) Closing of Books Election?
- When an S-corporation shareholder terminates their interest (dies, sells, etc.) during the tax year, §1377(a)(2) allows the corporation to elect to 'close the books' as of the termination date. Income allocated to the departing shareholder = actual income up to termination. Without the election, income is allocated pro-rata based on days owned. Useful when income is uneven through the year. Requires consent of all affected shareholders. Different from §754 (which doesn't apply to S-corps).
- Why is §1377(a)(2) Closing of Books Election important for startups?
- §1377(a)(2) Closing of Books Election is a tax concept that matters for startup founders because it directly affects fundraising readiness, financial decision-making, or operational discipline at the stage where mistakes are expensive to undo. Founders who understand it have a meaningfully easier time in diligence, board meetings, and investor conversations.
- What category does §1377(a)(2) Closing of Books Election belong to?
- §1377(a)(2) Closing of Books Election is a Tax term in the StartupCFO finance glossary — alongside other tax concepts that founders, CFOs, and accountants use in daily startup operations and reporting.
- Where can I learn more about §1377(a)(2) Closing of Books Election?
- Beyond this definition, see the related tax terms below, or explore StartupCFO's insights and tools that put §1377(a)(2) Closing of Books Election in context. For specific situations, talk to a fractional CFO who can walk through your numbers.
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