The Late S Corporation Election Houston Tax Attorneys Mitchell Tax Law

If you want to designate your existing business as an S corporation, you must file an election with the IRS within a specified time. If you fail to file this designation within the required period of time, the IRS considers the filing late and denies the application. However, the IRS What Is A Reasonable Cause Of Late S Corp Filing? does provide relief for late filings due to a reasonable cause. The IRS came to this conclusion despite the fact that the taxpayer timely filed a federal entity classification election, and the taxpayer did not apparently make a representation as to why its S election was not timely.

In today’s post, I’ll walk you through how to file a late S-Corporation election. I’ll also share with you my top-secret reasonable cause for filing late that has never been rejected by the IRS. Notably, certain estates, trusts, or other organizations may serve as shareholders, while certain types of corporations, such as DISCs, are ineligible. Logan is a practicing CPA and founder of Choice Tax Relief and Money Done https://kelleysbookkeeping.com/what-type-of-account-is-a-security-deposit/ Right. After spending nearly a decade in the corporate world helping big businesses save money, he launched his blog with the goal of helping everyday Americans earn, save, and invest more money. Although this exception exists, it is unlikely many situations will qualify since the current system is set up to notify the corporation of the problem with its filing requirement when the return rejects in processing.

It’s Not Too Late!—Untimely S Elections

If you haven’t heard anything and you think you should have, then contact the IRS. Until you receive approval from the IRS, your corporation will not be eligible to file an S-Corp tax return. One of the requirements for the S corporation is that distributions are made according to the amount of stock held (or LLC interest ownership percentage if it is an LLC). Becuase of this, the entity also has to update its By Laws and/or Articles of Orgnaization (if it is a LLC in Texas, it’s Company Agreement). This has to be done to ensure that the entity complies with the equal distribution requirement for S corporations. We’ve helped many companies that thought they filed their election or didn’t know they needed to file by a certain deadline obtain their desired S-Corp status.

While the taxpayer received a favorable determination from the IRS in this case, taxpayers should make every effort to make a timely S election. Moreover, taxpayers should be sure to shore up their arguments in the event their S elections are untimely—even though the IRS set a relatively low bar in this case. Ultimately, however, taxpayers should be mindful of various considerations relative to their treatment as S corporations. For purposes of this subsection, an election for a taxable year made not later than 2 months and 15 days after the first day of the taxable year shall be treated as timely made during such year. The Subchapter S corporation remains a popular choice of entity for small and medium-sized businesses. This is true even after the TCJA of 2017 lowered the income tax rate for C corporations to 21 percent.

How to File an S Corp Election Late

Unlike many other changes made by the TCJA, the 21 percent flat corporate rate is permanent. If you have missed the deadline, you will need to download Form 2553. It can either be filled out on your computer or printed and completed by hand. This helps the IRS determine whether or not your corporation is eligible. Even if you file a late S-Corp election, the most important information will be the date of incorporation and your corporation’s fiscal year.

Alternatively, you can file an election at any time during the tax year before the tax year when the election is to take effect. For example, the corporation electing S corporation status for 2019 could have filed the election any time in 2018. At least 6 months have elapsed since the corporation filed its IRS Form 1120S for the first tax year it intended to be an S Corporation;2. Neither the corporation nor any shareholder was notified by the IRS of any problems regarding S Corporation status within 6 months of the filing of its IRS Form 1120S for the first tax year it intended to be an S Corporation; and3. The entity is not seeking a late entity classification election (e.g., an LLC that “checks-the-box” to be taxed as a corporation and then makes an S election).

Forms & Instructions

However, tax journals and court documents show that certain reasonable causes are nearly always allowed. The Internal Revenue Service provides taxpayers the opportunity to cure an untimely S election given the proper circumstances. Much like other areas where a taxpayer may invoke reasonable cause (e.g., penalty abatement, trust fund recovery penalties, etc.), a taxpayer may use reasonable cause as a defense to failing to make a timely S election. IRS Form 1120S for the intended effective date of the S election must be filed less than 3 years and 75 days from the intended S election date; and2.

All other delinquent IRS Forms 1120S must be filed simultaneously and consistently with the requested relief. Sometimes companies wait until the last minute during the fiscal year to request their C corporation status be changed to an S corporation. Filing a late S-Corp Election need not be a difficult process when you follow the simple steps recommended in this piece. The S-Corp status puts you in control of your business expenses like you’ve never experienced before.

What Is a Reasonable Cause of Late S Corp Filing?

It is important that your business has reported and filed all income tax returns with the IRS since the time you should have elected to become an S-Corporation. Reasonable causes are that your company’s president, chief executive officer or similar responsible person neglected to file the election, or your corporation’s tax professional or accountant neglected to do so. In my practice, I have seen various issues related to a taxpayer’s S election. Corporations potentially jeopardize their S election by unknowingly creating a second class of stock through convertible debt. Corporations, particularly in community property states, may jeopardize their S election for failing to obtain the consent of the shareholders’ spouses.

• Only individuals, estates, and specific trusts may own shares, there can be no more than 100 shareholders, the business must be domestic, and there may be only one class of stock.
• X further represents that it and its sole shareholder have always filed their federal tax returns consistent with X‘s treatment as an S corporation.
• Our records don’t show that we accepted a Form 2553, Election by a Small Business Corporation, electing to be treated as an S corporation for income tax purposes.
• I’ll also share with you my top-secret reasonable cause for filing late that has never been rejected by the IRS.