What is a Late S-Election?

Most likely, when you first created your business, you formed a sole proprietorship or an LLC.  Your business has grown, and you are looking for ways to maximize your profits and minimize your tax liabilities, while still maintaining the protection of a separate legal entity.  One of the ways to achieve this is to take the subchapter S-Corporation election at the federal level.

An S-Corp is a golden ticket for self-employed small businesses! The S-Corp status puts you in control of your business expenses like you’ve never experienced before.

Most notably, it saves you the 15.3% self-employment tax on a large portion of your earnings. 

Layer on special deductions for business use of home, miles, and retirement contributions, and watch the savings add up. Your business has moved from a simple sole prop to a well-oiled, tax savings machine. You get all the benefits of a larger corporation without needing to pay double taxation – like in a C-Corp.

The business will file Form 2553, Election by a Small Business Corporation, with the Internal Revenue Service to make an election under section 1362(a).  Specific rules exist regarding which businesses are eligible to take the S-Corp election.  Only individuals, estates, and specific trusts may own shares, there can be no more than 100 shareholders, the business must be domestic, and there may be only one class of stock.  S-Corporations are pass-through entities, with the individual owners reporting the income or loss on their personal tax returns.

When can you file the S-election?

A business can file Form 2553 any time the year before the effective date or within two months and fifteen days of the new tax year. The effective date is the date the business intends to function as an S-Corporation and is generally either the date of formation or the first day of the tax year.

For a business with no prior tax year, the 2553 must be filed within two months and 15 days of formation.  If a business was formed on March 10th, 2024 the deadline for submitting the form would be May 24th, 2024 to have S-Corp status in 2024, the first year of business.

For a business that has a prior tax year, March 15th is the deadline for filing to be effective for the new year.  The business could submit 2553 any time in the prior year to be effective in the new year.  So, an LLC taxed as a sole proprietorship in 2023 can file 2553 by March 15th, 2024, or at any time in 2023 to be effective starting January 1st, 2024.

For a new business formed towards the end of the year, which leads to a tax year lasting less than two and a half months, the submittal of Form 2553 must be between the date of formation and two months and 15 days later.  If a business forms on November 15th, 2023 it would have until January 29th, 2024 to submit an S-election and file in 2023, for a short tax year, as an S-Corporation.

When should you file a late S-election?

A business may have missed the deadline to file the S-Corporation election or did not know that a special form needed to be filed.  This leads to a late S-election.  The IRS has developed a procedure that requires the business to submit required documentation within 3 years and 75 days of the effective date listed on the Form 2553.

To file a late S-Election you must fill out the Form 2553 and enter on the top margin of the first page of the form, “Filed Pursuant to Rev. Proc. 2013-30.”  This revenue procedure tells you how to submit the late filing, which includes submitting the Form 2553, supporting documents, and a statement that provides reasonable cause.

A completed Form 2553 must be signed by an officer of the company and any shareholders.  Each shareholder must submit a statement declaring that they have reported any income on all affected returns starting on the date the S-election should have been filed and all subsequent years.  The business must state that it meets the definition of an eligible entity and that it intended to be classified as a corporation as of the effective date.  The business will represent that it failed to qualify as a corporation solely because Form 8832, Entity Classification Election, was filed late or not filed at all and that the business did not qualify as an S Corporation on the effective date only because the Form 2553 was not filed.  A business must also state that all corporate tax returns and information returns were filed on time consistent with filing as an S-Corporation.

For the IRS to grant the late election, the company must show reasonable cause for the failure to file on time.  Examples of acceptable reasonable cause include a lack of knowledge, meaning the business and/or its owners did not know that advanced filing of the Form 2553 was required, or basic neglect, such as when the CEO or company accountant failed to file the form on time.  In addition to providing reasonable cause, the company must show that it acted diligently to correct the mistake.

Have you filed your S-election? If not, don’t despair.

We can help! You may still have the option of submitting a late S-election request.