Jul 01, 2021When You (Accidentally) Miss the S Corp Deadline
S Corp deadlines, eligibility requirements, and filing procedures can be tricky to navigate. In fact, you may often find yourself wondering if being taxed as an S corp is worth the hassle. In this article, we’ll discuss how to become an S Corp, the deadline for electing, and what to do if you miss it.
What are the Benefits?
First of all, why would a company want to be taxed as an S corp? Here are the two main reasons: S corps allow owners to avoid both double taxation and self-employment taxes. S Corporations are the only flow-through entity that does not require owners to tax business income as earnings from self-employment.
In other words, S corps are the only entity that avoids both double taxation and self-employment taxes. Because this is such an advantaged structure, businesses must meet and maintain strict requirements set forth by the IRS. S corporation status is also never the default status of a business entity. Rather, businesses must make a valid S election and receive IRS permission in order to be taxed as an S Corp.
Making an S Election
An entity may make an S election by filing Form 2553 with the IRS. This form includes entity information, signatures from an officer, and the signature of every shareholder. That’s right, in order to make a valid S election, an entity is required to have the consent and signature of everyone owning shares in the business. Because Form 2553 contains handwritten signatures from each shareholder, it cannot be e-filed. Rather, it must be mailed to the appropriate IRS location.
The IRS has imposed strict deadlines for filing Form 2553. For a new business entity electing to be an S corp, the election must be made and postmarked on or within 2.5 months of formation. For an existing business entity wishing to change to S corporation status, the election must be made on or before the 15th day of the third month of the initial S corporation year. Because most S corps are required to have a calendar year-end, the election is typically due on March 15th in the tax year of change.
Relief for Late Elections
It’s not uncommon for a business to file Form 2553 late. After all, securing signatures from each shareholder can be an arduous task. By default, businesses filing an S election after the deadline must wait an additional year before they are again eligible to switch status. Fortunately, the IRS has extended relief for late elections under specific circumstances. Relief simply means that the IRS will treat the business as though it had made a valid S election by the deadline.
Requirements to Qualify
In most cases, late election relief is granted if the following both apply:
- The entity failed to qualify as an S corporation solely because Form 2553 wasn’t filed by the deadline; AND
- The entity has reasonable cause for its failure to timely file Form 2553 by the deadline.
For a more exhaustive list of requirements to qualify for late election relief, see Rev. Proc. 2013-30.
Procedures Required to Receive Relief
Though a business may qualify for late election relief based on the facts and circumstances surrounding its failure to file Form 2553, there are still several procedural actions that must be completed before the IRS will grant relief. Though not difficult, failure to perform these actions may result in months of waiting and the ultimate rejection of a late S election.
The following procedural items MUST be done in order to receive late election relief from the IRS:
- The entity must enter in the top margin of the first page of Form 2553 the words, “FILED PURSUANT TO REV. PROC. 2013-30.”
- If the late election is made by attaching Form 2553 to Form 1120-S (an S corp tax return), the entity must enter in the top margin of the first page of the Form 1120-S the words, “INCLUDES
LATE ELECTION(S) FILED PURUSANT TO REV. PROC. 2013-30.”
- Finally, the business must state its reasonable cause for not filing Form 2553 by the deadline in Box I of its Form 2553.
S corps are an extraordinarily tax advantaged entity. As such, the IRS won’t let just any business become one. Unlike other entities, electing businesses must get the consent of all shareholders and file a valid election by the deadline. Because of the complexity surrounding the election and maintenance of S corporate status, business leaders should strongly consider working with tax professionals to ensure that everything is filed correctly and on time.
The decision to elect to be taxed as an S corp is a big one. S corporations have major tax advantages for their shareholders. While the process can be complex and difficult, many businesses find that electing S corporate status is certainly worth the work.