The S Corp Election

An S Corp is a corporation that elects and is eligible to choose S Corporation status.  There are advantages and disadvantages of selecting S Corp status for your eligible entity, and those should be considered carefully with your financial planning team, including your CPA.  Generally, an S Corp is a corporation that does not pay income taxes.  Rather, the income and deductions of the business are passed through to its shareholders.  In return, the shareholders report the income and deductions on their individual tax returns. There are a number of rules inherent in this election, but today I want to focus solely on how to make the election. 

Making the Election

The actual election for S Corp status is accomplished by filing Form 2553, Election by a Small Business Corporation.  The election must be made by the 15^th day of the 3^rd month of its tax year in order for the election to be effective beginning with the year made.  A few simple examples will clarify what that language means.

Example #1 – Entity XYZ was formed on and began operations on June 1, 2012.  In order for their S election to be filed timely and effective June 1, 2012, Form 2553 should be filed by August 15, 2012.

Example #2 –Entity XYZ was formed on and began operations on June 1, 2010.  They want their S election to be effective on January 1, 2011.  In order for their S election to be filed timely and effective January 1, 2011, Form 2553 should be filed by March 15, 2011.

Did you miss your election timeframe?

There are methods of requesting IRS relief for a late S election and your CPA should be consulted in order to carry out said late elections.  Most commonly, a late election can be filed with filing of the tax return and use of the reasonable cause exclusion as detailed in Revenue Procedure/Private Letter Rulings issued by the IRS.  Again, your CPA should be consulted closely to carry out this late election. 

As you analyze your filing status, the decision to file as an S Corp is one that should be weighed carefully with proper consultation.  There are numerous eligibility requirements that must be met.  Lastly, adhere to the timelines provided above.  If you are considering S Corp status for your entity and need assistance in filing your election or making the decision, please contact our Firm.

brad@mcarthurco.com
704.544.8429