When it comes to preparing taxes for your business, the type of business you decide to operate as can have a considerable effect on its tax liability. We’ve talked about the benefits of registering as an S corporation or S Corp compared to other business models in previous discussions.

But what if you want to reap the benefits of this model before you’re actually able to finish registering as one? Don’t worry, we understand how busy life can get, and we’re prepared to walk you through the process of filing your late S election.

Requirements for S Corporation Status

In order to establish your business as an S Corp, your business must meet the following criteria:

  • Be a domestic entity
  • Have only allowable types of shareholders (individuals, estates, and certain trusts)
  • Have no more than 100 total shareholders
  • Have only one class of stock
  • Not be an ineligible entity (such as certain financial institutions, insurance companies, and domestic international sales corporations)
  • No shareholders can be partnerships, other corporations, or non-resident aliens

It’s important to note that even though you can operate as an S Corp before completing the election, your business must still meet all these requirements during that time.

Filing Your S Corporation Election

When it comes time to set up your S corporation, you’ll need to complete IRS Form 2553. For new businesses, you should complete and file Form 2553 no more than two months and 15 days after the beginning of the tax year the election is to take effect. You also have the option to file at any time during the tax year before the year it’s supposed to take effect.

Late Filing Relief Requirements

However, what happens if you can’t complete the filing when you originally planned? To qualify for late filing relief, these requirements must be met:

  1. The business you intend to have classified as an S corporation must be an eligible entity and only failed to qualify because the election was not timely filed
  2. Your business must have had reasonable cause for not filing on time
  3. Less than 3 years and 75 days have passed since the effective date of election and the date you’re filing Form 2553
  4. The entity and all shareholders must have reported their income consistent with that of an S Corp for the year the election should have been made and all years after

Exception to the Time Limit

An exception can be made for the 3 years and 75 days rule, although it’s difficult to qualify for. The requirements include:

  • At least 6 months must have gone by since the date the corporation filed its first tax return as an S Corp using IRS Form 1120S
  • Neither the corporation nor any of its shareholders was notified by the IRS of any problems regarding the S Corp status within that 6-month period
  • The completed Form 2553 must include all required statements described within the IRS revenue procedure

Important Considerations

It’s very important to remember that even though relief is possible, you must still have a valid reason for not filing Form 2553 and completing the election on time. Failing to do so correctly can result in the IRS treating you as a standard corporation or single member LLC, resulting in additional taxes due and potential penalties.

For any help setting up your own late S election, reach out to our office and we will be happy to help you through the process.