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S Corporation Election Guide

S corporations, sometimes referred to as sub-chapter S corporations, differ from C corporations in two important ways. First, although it is formed in the same way as a C corporation, the corporate entity, along with the IRS, has opted to be taxed as a “pass-through entity” under subsection S of the Internal Revenue Code. This means that an S corporation is not a separate taxable entity; profits and losses are “passed through” and reported on the shareholders’ individual income tax returns, just like a partnership.

What are the benefits of being an S corporation?

A corporation can avoid double taxation (once to shareholders, again to corporation) by choosing to be treated as an S corporation. Generally, S corporations are exempt from federal income tax, with the exception of certain capital gains and taxes on passive income. On their tax returns, S Corp Late Election  shareholders include their share of the corporation’s separately listed income, deductions, losses, and credit items, as well as their share of non-segregated income or losses.

What are the requirements to become and/or maintain S Corporation status?

In order to qualify as an S corporation, your corporation must be filed as a U.S. corporation, hold only one class of stock, have no more than 100 shareholders, and must consist of only individuals, estates, or shareholders of certain qualified trusts, who agree in writing to the S The corporation is elected and has a US Social Security Number (thus, the corporation cannot have non-resident alien shareholders) and the corporation’s tax year must end on December 31. If your corporation fails to comply with any of the above requirements, you may not be eligible for S corporation status, or your S corporation status may be revoked by the IRS at any time.

What if you miss the last day of the Corporation election?

Delayed election to become an S corporation is generally effective for the tax year following the tax year beginning on the date entered on line E of Form 2553. However, if the company can demonstrate that the failure to file on time was due to reasonable cause.

How to Apply for S Corporation Status

To apply for S corporation status, your corporation must complete and file IRS Form 2553 with the IRS no later than two months and 15 days (75 days) from the date of incorporation to elect to file for the tax year. Once received by the Service Center, the company will be notified no later than 60 days after the application is submitted whether or not the election has been accepted; you will also be notified if your election has not been accepted.

Fix late S election

To become an S corporation, the corporation must make a subchapter S election no later than the fifteenth day of the third month of the tax year in which the election is effective. If elections are not held on time, the corporation will be considered a regular (i.e. Subchapter C) corporation. This deadline is in the IRC; therefore, the IRS has no authority to waive it, nor can it allow the election to be delayed. The rigidity of this position proved troublesome, especially when the S elections were inadvertently flawed (and thus considered Late Election for S Corp submissions). Typically, corporations and shareholders do not know that the S election is invalid until well after the end of the tax year.

SBJPA

That all changed with the passing of the Business Jobs Protection Act of 1996 (SBJPA), which allowed the IRS to repeal the decision of the S inertia for failing to qualify or obtain the required ownership. The IRS may now consider final S decisions at a time when the IRS has found that there is a valid reason for such failure. From the SBJPA, the IRS has issued a directive that companies may request automatic assistance in “delayed” S elections such as:

  • When a corporation fails to become an S corporation simply because it did not file an election in time. This means that the entity intends to be an S corporation; the corporation and its shareholders report S-status income in the year in which an election is due and all subsequent years; and the IRS is on the date the corporation’s S corporation return is filed in a timely manner not notify the company or any shareholders of any problems with its S status within six months of
  • Automatic embossing. In order to receive automatic relief, the corporation must file a complete Selection, signed by authorized corporation officers and all shareholders at any time during the entity’s intention to become an S corporation. A dated statement, signed by these persons, certifying that all income reported by the company and shareholders (on all affected returns) is consistent with the year in which the S election should be made and S status for all subsequent years must be attached and signed punished by perjury.

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