s election
Accounting Small Business Tax Policy

How to Make an S Election?

What is an S Election and what is it used for?

To make a valid S-election you need to file Form 2553. However, it’s not as easy as filling out a form and mailing it to the IRS… so let’s get right into it. 

Who may elect S status?

Generally, to make a valid S-election you’ll need to have an eligible entity that meets all of the following criteria:

  • Must be an eligible domestic corporation or a domestic entity eligible to be a corporation,
  • Have less than 100 eligible shareholders,
  • Only have one class of stock, and
  • Timely files form 2553.

There are additional nuances when it comes to eligibility but for the sake of simplicity, we’ll cover the most common points below:

What entities are eligible?

To create an S corp., you’ll either need to have an existing entity or create a new entity. An existing C corporation (1120), LLC treated as a disregarded entity (Sch C filers), or an LLC treated as a partnership (1065) may all elect S status assuming they meet the other test. You can also create a new entity and elect S status from inception.

Who are eligible shareholders?

Only eligible shareholders may have an ownership interest in an S corporation. Eligible shareholders include:

  • Individuals,
  • Estates,
  • Certain exempt organizations, and
  • Certain trust (grantor trust, qualified subchapter S trust (QSST), and electing small business trust (ESBT).

Ineligible shareholders include:

  • Partnerships,
  • Corporations,
  • Ineligible trust (any trust other than the trust listed above)
  • Nonresident aliens

If you have an existing entity or plan on creating a new entity, make sure the owners are all eligible owners. Even one ineligible owner can jeopardize the S-election.

One Class of Stock

An S corporation can’t have more than one class of stock. This means an S corporation can’t have preferred stock. Additionally, when converting from a partnership to an S corporation you should change the operating agreement. The old partnership agreement may contain provisions that accidentally create a second class of stock.

When to Make the Election?

You must complete and file Form 2553 no more than 2 months and 15 days after the beginning of the tax year the election is to take effect. This means that for an S election to take effect on January 1, 2024 the Form 2553 would need to be filed anytime before March 15, 2024.

But what if you created an entity on July 7th? When is the 2553 due? Well, the 2 months after July 7th ends September 6th and 15 days later is September 21st. Essentially, an S-election can be made anytime during the year as long as the form is filed within 2 months and 15 days of the effective date.

What if I Missed the Deadline?

Simply filing Form 1120S, U.S. Income Tax Return for an S Corporation does not count as making a valid S-election. You will need to file Form 2553 to make the election effective. If you failed to file Form 2553 you can request late election relief if all the following are true:

  1. The entity intended to be classified as an S corporation,
  2. The late Form 2553 is filed within 3 years and 75 days after the effective date,
  3. The entity would have met all the requirements of an eligible S corporation if Form 2553 was timely filed (see above eligibility requirements), and
  4. There is reasonable cause for its failure to make the timely election.

When filing Form 2553 for a late S corporation election, the entity must enter in the top margin of the first page of Form 2553 “FILED PURSUANT TO REV. PROC. 2013-30.”

However, don’t mistake the late election relief as an opportunity to retroactively claim S status. Some ‘practitioners’ claim that the late election relief allows you to go back 3 years and claim refunds for self-employment taxes. Remember, the late election is for entities that intended to be classified as an S corporation and have reasonable cause for failure to file a timely Form 2553. Claiming the incompetence of your prior accountant for not telling you the benefits of being an S corporation does not constitute reasonable cause.

Do I Need to Filed Form 8832?

Form 8832 is used by an entity that wishes to change its tax classification. For example, if a partnership wishes to convert to a C corporation it would generally need to file Form 8832. However, an eligible entity that wishes to elect S status will generally not have to file Form 8832.

Per the instruction of the Form 2553, an entity eligible to elect to be treated as a corporation that meets certain tests (discussed above) will be treated as a corporation as of the effective date of the S election and doesn’t need to file Form 8832.

What Next?

Creating a new S corporation or converting an existing entity over to an S corporation can be complex. Don’t go it alone! Reach out to a trusted advisor to help you file all necessary forms for your S election.

Jeremias Ramos is a CPA working at a nationally recognized full-service accounting, tax, and consulting firm with offices conveniently located throughout the Northeast. Jeremias specializes in tax and business consulting with focus areas in real estate, professional service providers, medical practitioners, and eCommerce businesses.

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