Navigating the Tricky World of S Corporation Elections | USTaxAid

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Navigating the Tricky World of S Corporation Elections

Written by Diane Kennedy, CPA on April 29, 2022

An S Corporation is a type of corporation that “passes through” income/loss and some specific deductions to shareholders. It’s often the first type of tax structure that a start-up business will use.

There are a couple of ways to get to the S Corporation tax status, though. You could form an LLC (limited liability company) and then elect to be treated as an S Corporation. Or you could form a corporation and elect to be treated as an S Corporation. If you have an LLC and don’t make an election, you will either be a Sole Proprietorship (single member) or partnership (multi member). If you have a corporation and don’t make an election, you will be a C Corporation. 

Where Do You Make the Election? 

The tax election is made with Form 2553 to the IRS. In some states, you are also required to make a state election. Check for the most current law for your home state. Here are some of the current (at the date of this article) laws in significant states.

New Jersey requires that you file Form CBT-2553 to elect to be taxed as a New Jersey S Corporation.

New York requires that you file Form CT-6 to elect to be taxed as a New York S Corporation.

Georgia accepts the federal S Corporation election, but they do require another form, Form 600S-CA from nonresident shareholders. If this is not filed, the S Corporation status will be terminated in Georgia. 

Note that these state requirements are in addition to the federal election.

The deadline to file the federal is within 2 ½ months after the formation of the entity. 

What If You Miss the Deadline to File For S Corporation Status? 

There are several possible solutions if you miss the S Corporation deadline.

You could file for the next year, and use either the default tax structure for either the LLC or C Corporation. The final answer will depend on what type of structure you formed initially. 

You could file a late election.

For federal tax purposes, here is how a late election works. You must establish that you intended for the entity to be an S Corporation, the failure to file is only the result of lack of timely filing, less than 3 years and 75 days have passed since the intended effective date and reasonable cause exists for failure to file. 

In addition, you may have late state S Corp election filing issues

A New Jersey late S Corp tax election can be made by submitting CBT-2553-R with all applicable signatures and a payment of $100 for each year that is impacted by backdating the election. 

A New York late S Corporation election may be validated once the S Corp election has been validated by the IRS. File NY Form CT-6 along with an attachment explaining the circumstances and a copy of the federal approval letter. 

How do You File a Late Election? 

The IRS late election is filed by submitting a completed Form 2553 that has the following notation at the top: “Filed pursuant to Rev Proc 2013-30”. It must be filed with the Service Center where the original election would have been filed.

Additionally, there must be a Reasonable Cause Statement attached. This describes a reasonable cause for failure to file and what the corporation did once it was discovered. This statement must contain a signed and dated penalty of perjury declaration as follows:

“Under penalties of perjury, I (we) declare that I (we) have examined this election, including accompanying documents, and, to the best of my (our) knowledge and belief, the election contains all the relevant facts relating to the election, and such facts are true, correct and complete.”

Strategy First

The business structure you choose is an important part of a tax saving and asset protection plan. Don’t jump into a structure without good guidance first.

We spend a lot of time talking about strategies to reduce your taxes, create more cash flow, build sustainable wealth and protect your assets as part of Wednesday Coaching. Join anytime! 

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