How to make an S-Corp Election
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A corporation informs the Internal Revenue Service of its choice to be taxed as an S-Corporation instead of as a C-Corporation using IRS Form 2553. It is extremely important for a newly formed corporation to make this decision early.
Forming an S-Corporation
In order to create an S-Corporation, the organizers of the business must take the following steps:
- Draw up articles of incorporation, by-laws, and various resolutions,
- Incorporate the business as a corporation in the state where the company will conduct the bulk of its business,
- Verify that the corporation meets the eligibility criteria for being an S-Corporation, and
Electing S-Corporation Status
Corporations elect S-Corporation status using IRS Form 2553. Each shareholder at the time the form is filed must sign the form.
When to Submit Form 2553
IRS Form 2553, Election by a Small Business Corporation (instructions, PDF form) must be filed:
- Before the 16th day of the 3rd month of the corporation’s tax year,
- Before the 15th day of the 2nd month of a tax year lasting 2-1/2 months or less,
- At any time during the tax year before the tax year the election is to take effect,
- At any time after these deadlines if the corporation follows special rules for making a late S-corporation election.
Normally, if a corporation that files Form 2553 after the 15th day of the third month of its tax year but before the 15th day of the third month of the following tax year, then the IRS considers the S-Corporation election to be valid for the following tax year and not valid for the preceding tax year.
However, a corporation can file Form 2553 late and still receive IRS approval to make the election retroactive to the beginning of the corporation’s tax year. Here’s the rules you need to follow.
Eligibility Criteria for Late S-Corporation Elections
To qualify for relief from the late filing of Form 2553, the corporation must meet all the following criteria:
- The corporation meets the S-Corporation eligibility criteria,
- The corporation intended to be classified as an S-Corporation as of the intended effective date of the S-Corporation election,
- The corporation failed to qualify as an S-Corporation solely because it did not file Form 2553 in a timely manner,
- Less than 24 months have passed since the original due date of Form 2553,
- The corporation either has reasonable cause or inadvertently failed to file Form 2553 in a timely manner,
- The corporation has not yet filed tax returns for the first tax year for which it intended to file as an S-Corporation, or the corporation has filed its first tax return using Form 1120S and the shareholders properly reported their share of income in a manner consistent with the corporation’s intention to be an S-Corporation,
- Form 2553 is filed not later than 6 months after the due date (without regard to extensions) of the first tax return for which the corporation intended to file as an S-Corporation, and
- Shareholders and other taxpayers have not reported their income in a manner inconsistent with the corporation’s intention to file as an S-Corporation.
If the company meets these requirements, then company should file IRS Form 2553 by writing at the very top of the form the following words: “FILED PURSUANT TO REV. PROC. 2003-43” and attaching a statement indicating that the corporation either had reasonable cause (and spell out the circumstances) or inadvertently failed to file Form 2553 in a timely manner. For more information, or help with your S-Corporation election, please contact us.