S Corporation Election Deadline: Everything You Need to Know
The S corporation election deadline is the time at which you must decide whether you want to elect your corporation to be taxed as an S corporation.3 min read
Forming an S Corporation
For many business owners, an S corporation is a better option than a C corporation for taxation and other aspects of running the company. In order to elect for treatment as an S corporation, you must file IRS Form 2553, which is titled Election by a Small Business Corporation. When a corporation is formed, it starts as a for-profit, general C corporation. Before a business reaches that status, the owner(s) must incorporate by following the steps required in the state in which it will do business.
After a business has incorporated, the owners must verify that it meets the criteria to be eligible to operate as an S corporation.
Eligibility criteria to become an S corporation includes:
- One class of stock, allowing all owners to share the losses and profits equally, based on the percentage of ownership in the business.
- No more than 100 shareholders.
- All shareholders are individuals, not partnerships or LLCs.
- All shareholders are legal residents of the U.S.
Upon determining that a corporation is eligible to operate as an S corporation, the owners must then complete Form 2553 and file it with the IRS. The IRS will provide notification to state whether the election has been accepted within 60 days of filing Form 2553.
The S corporation election deadline is the 16th day of the third month of the tax year of the corporation. If the tax year is 2.5 months or less, the deadline is prior to the 15th day of the second month of that tax year.
Procedures for Late Elections for S Corporation Status
If you fail to file Form 2553 before the deadline has expired, you do have another option. You must request approval from the IRS to retroactively approve the S corporation election, dated to the start of the tax year of the corporation.
If a corporation has filed Form 2553 before the 15th day of the third month of the next tax year, but after the 15th day of the third month of the current tax year, the IRS will typically allow that corporation to elect for taxation as an S corporation for the following tax year only. In order to elect for the current tax year, the corporation must be eligible for a late election.
Generally, the IRS does offer some flexibility in the deadline for a corporation, but the owners must provide reasonable cause for going past the deadline. Additionally, the IRS only permits late filing if the corporation failed to file the form on time, not if the corporation had any other reason for not electing S corporation taxation. When requesting approval for a late filing, you will need to include a statement with Form 2553 that indicates that the corporation failed to file the form on time, or that details the reasonable cause for failing to file on time.
In order to file late, a corporation may have to show that it had reasonable cause for the delayed filing. This term relates to the specific circumstances or facts that led to the forms being filed past the deadline.
According to the IRS, reasonable cause relates to each individual situation. The IRS will consider any reason that shows the corporation was using prudence and care to meet its obligations but was unable to do so. If the conduct of any taxpayer justifies the abatement or non-assertion of a penalty, that taxpayer would have reasonable cause. All cases are individually judged, based on what information is provided.
When to Submit Form 2553
The owners of a new corporation must file Form 2553 within 75 days of the date the business was incorporated.
Why Should I Form an S Corporation?
One of the main benefits of electing for treatment as an S corporation is avoiding double taxation. All taxable income of an S corporation is passed on to the shareholders. The shareholders then must report that income on their personal tax returns. All net income of an S corporation is only taxed on the personal level of the shareholders.
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