If you have a business and you’re taxed as a Sole Proprietorship (Schedule C), you’ll pay self-employment tax of 15.3% on your profits. If you have a single member LLC and you fail to make an S Corp election, you’ll pay the same 15.3% self-employment tax.
Normally, you have to make that election within the first 2 ½ months (75 days) of the year, or after you have formed the company (if it’s the first year).
We have new rules now!
Under Rev. Proc. 2013-30, an S corporation that failed to make a timely S election may file Form 2553 within 3 years and 75 days of the date it wished its S election be effective. For example, if a corporation intended to elect to be taxed as an S corporation on January 1, 2013 but failed to file Form 2553, the corporation can obtain late relief by filing Form 2553 any time before March 15th, 2016. In other words, you’ve got another 3 years to make the election.
But it gets even better.
Section 5.04 of the Rev. Proc. provides that you can even file a late election AFTER 3 years and 75 days have passed, provided the following conditions are met:
- The corporation is not also seeking a late entity classification election (i.e., an LLC electing to concurrently be treated as a corporation AND making an S election);
- At least six months have passed since the date on which the corporation filed its tax return for the first year the corporation wanted to be treated as an S corporation, and
- Neither the corporation nor any of its shareholders were notified by the IRS of any problem regarding the S corporation status within six months of the date on which the Form 1120S for the first year was timely filed.
Essentially, this means that there is no time limit on how far back a corporation can make a late S election effective, provided it has always filed as an S corporation, the shareholders have reported the income accordingly, and the IRS has not notified the corporation that its election was never filed.
Should you have been an S Corporation and are afraid it’s now too late?
Don’t panic, there is probably still time to file based on these new rules from the IRS. Give us a call at 775-589-2085 if we can help.