Starting a business involves a myriad of decisions, each with its own set of financial and legal implications. Among them, choosing the right tax status is critical, as it determines both the structure of tax payments and the liabilities a business faces.
For many business owners, electing to be treated as an S corporation offers significant tax benefits. However, meeting the strict filing deadline for this election is critical. Missing this deadline can result in the loss of tax benefits for the period in which the election was not in effect.
Fortunately, the Internal Revenue Service (IRS) provides a way to correct this oversight. This article outlines the steps you need to take to correct a missed S corporation election deadline and ensure that your business can still benefit from S corporation status despite the initial delay.
What is S Corporation status?
An S corporation is not a type of business entity, but a tax status that can be elected by both corporations and LLCs (limited liability companies). This status is attractive because of its “pass-through” taxation feature, which makes it an ideal candidate for the best business structure for taxes for some businesses.
Contrary to C corporations, S corporations are not subject to corporate-level taxation. Instead, profits and losses directly flow through to the shareholders’ personal income tax returns, thereby preventing the double taxation on corporate earnings.
To be designated as an S corporation, a company must satisfy specific criteria set by the IRS. This includes having shareholders that are eligible, such as individuals, specific trusts, and estates, while excluding partnerships, corporations, and nonresident alien shareholders.
In addition, the S corporation may have no more than 100 shareholders and only one class of stock. Despite its limitations, S corporation status is highly sought after for its tax benefits and the simplicity it can offer to business operations in terms of tax filing.
Understanding the election deadline
The timing for electing S corporation status is governed by specific IRS rules. To obtain this status, a corporation must file Form 2553, “Election by a Small Business Corporation,” by a certain deadline.
Important Form 2553 filing deadlines
The IRS requires that Form 2553 be filed no later than two months and 15 days after the beginning of the tax year in which the election is to be effective.
For new businesses, this means the form must be filed within two months and 15 days of the date of incorporation.
For existing corporations wishing to change their tax status, the deadline is two months and 15 days after the beginning of the tax year in which S corporation status is desired.
These deadlines are critical because they determine when the benefits of S corporation status will apply. If these deadlines are missed, the business will not be able to take advantage of the S corporation tax benefits for that tax year unless it qualifies for and successfully files a late election.
Consequences of missing the deadline
Missing the S corporation election deadline can have significant tax implications for a business. Without S corporation status, a business may be treated as a C corporation or a partnership, depending on its structure.
This treatment can result in different tax consequences, such as double taxation in the case of C corporations, where profits are taxed at both the corporate and shareholder levels.
In the absence of S corporation status:
- The corporation faces potentially increased tax liability due to the inability to pass through corporate income, losses, deductions, and credits to shareholders.
- Financial planning for the business can be complicated as shareholders deal with the unpredictability of tax obligations.
- The business may also face varying regulatory requirements and increased administrative burdens.
How to file a late election for an S corporation?
If you miss the initial deadline for electing S corporation status, you can still make a late election under certain circumstances using the guidelines provided in IRS Revenue Procedure 2013-30.
IRS Revenue Procedure 2013-30 step-by-step filing guide
- Determine eligibility. First, make sure your corporation qualifies for late election relief. Your business must have intended to be classified as an S corporation from the date the original election should have been effective, and all shareholders must have reported their income consistently with an S election for each year the election should have been effective.
- Prepare Form 2553. Complete IRS Form 2553, Election by a Small Business Corporation. Be meticulous with details such as the corporation’s name, address, date of incorporation, and tax year for which the election should apply.
- Explain reasonable cause. On Form 2553, specifically Part I, Line I, you must explain why the S corporation election was not filed on time. This part of the form should include a detailed statement of all the facts that led to the late filing and describe the reasonable cause for the delay.
- Consent Statement. You must include consents from all shareholders. These statements should confirm that each shareholder consents to the late election and that all have reported their income as if the S corporation election had been in effect.
- Write on the form. Write “FILED PURSUANT TO REV. PROC. 2013-30”.
- Submit the form. Mail or fax the completed Form 2553 to the appropriate IRS service center. For current addresses and fax numbers, see the IRS website or the latest instructions for Form 2553.
- Follow up. After filing, it’s important to follow up to make sure the form has been received and processed. The IRS typically takes about 60 days to respond to S corporation election applications, but this can take longer during peak periods.
- Receive IRS confirmation. After processing, the IRS will send a letter confirming acceptance of your S corporation status. This letter will include the effective date of the election.
By following these steps, you can correct a missed S corporation election deadline and secure the desired tax status for your business. Remember, navigating the intricacies of IRS procedures can be complex, and it is often advisable to consult with a tax professional to ensure accuracy and compliance.
Reasonable cause for missing the deadline
The IRS will allow a late S corporation election if the business can show “reasonable cause” for missing the original filing deadline. Reasonable cause includes circumstances beyond the control of the filer that prevented the timely filing of the election.
Good cause may include, but is not limited to:
- Natural disasters affecting business operations.
- Serious illness or disability of a key person responsible for filing tax returns.
- Significant, unforeseen business disruptions, such as a major fire or theft.
- Errors in professional advice where the taxpayer was misinformed about filing requirements.
Document your reasonable cause
When claiming good cause, it is important to provide a detailed and factual explanation, supported by documentation if possible.
The explanation should clearly link the circumstances to the missed deadline and demonstrate how these events were beyond your control and directly affected your ability to file on time.
Submit your late election
Once you have prepared your Form 2553 with all the necessary documentation and reasonable cause statement, you must submit it to the IRS for processing.
Where and how to file your corrected Form 2553?
1. Mailing
You can mail your completed Form 2553 to the IRS. The specific IRS Service Center address to which you should mail the form depends on the state in which your business is located. Refer to the Form 2553 instructions or the IRS website for the appropriate address.
2. Faxing
You can also fax your Form 2553. The IRS provides fax numbers for this purpose, which are also listed in the Form 2553 instructions. Faxing can be faster than mailing, but it’s important to confirm that all pages have been successfully sent and received.
Acknowledgement of receipt
Whether you mail or fax your form, it’s a good idea to follow up with the IRS to confirm that your Form 2553 has been received and is being processed.
You can do this by calling the IRS Business and Specialty Tax Line, where you can also inquire about the expected processing time.
Expectation of response
After submitting your late election form, expect to receive confirmation from the IRS. This confirmation usually comes in the form of a letter indicating whether your late S corporation election has been accepted and the effective date of your S corporation status.
By ensuring that your Form 2553 is properly completed, accompanied by a solid explanation of reasonable cause, and submitted to the correct IRS address or fax number, you can effectively correct a missed S corporation election deadline.
Common mistakes to avoid
Filing a late S corporation election can be tricky, and mistakes can delay the process or cause your application to be denied. Here are some common mistakes to watch out for:
- Incomplete forms. Make sure all required sections of Form 2553 are completed correctly. Missing information can result in processing delays or outright denial.
- Incorrect addresses or fax numbers. Submitting the form to the wrong IRS Service Center or using an incorrect fax number may result in your form not being processed.
- Failure to provide a detailed reasonable cause. Simply stating that you missed the deadline is not enough. A detailed, plausible explanation, supported by documentation, is required.
- Lack of consistent shareholder reporting. If all shareholders haven’t consistently treated income with an S corporation election, the IRS may deny the late election request.
When to seek professional help?
Given the complexities and potential pitfalls of filing a late S corporation election, seeking professional tax advice is often a prudent step. Here are some scenarios in which you may want to consider professional help:
- If you’re unsure of the appropriate reason. A tax professional can help formulate a compelling reasonable cause for missing the deadline.
- Complex business structures. Businesses with complex structures or numerous shareholders may find it difficult to navigate the requirements.
- Previous denials. If you’ve previously attempted to file a late election and were denied, a tax professional can help you address the issues identified by the IRS.
- Legal Implications. Understanding the broader legal and tax implications of changing your company’s tax status is critical.
Bottom line
Correcting a missed S corporation election deadline is a detailed process that requires careful attention to IRS guidelines and deadlines.
By understanding what to expect after filing, avoiding common mistakes, and knowing when to seek professional advice, you can successfully navigate this complex process.
Remember, while you can handle this process on your own, the guidance of an experienced tax professional can be invaluable in ensuring that your late election is successful and beneficial to your company’s tax strategy.