For many people who are starting a new business, organizing an S-Corporation (“S-Corp”) offers the business owners many advantages. In addition to limited liability and protection of personal assets, among other things, stock holders have the benefit of pass-through, single-level taxation.
In order to obtain status as an S-Corp, after incorporation with a particular secretary of state, the corporation must elect to be treated as an S-Corp by filing the appropriate paperwork with the IRS. However, for various reasons, whether the owners forgot, thought an accountant was doing it, or merely wasn’t aware that an election needed to be made, a corporation may fail to make an S-Corp election. In an effort to provide relief to corporations that make late elections, the IRS has instituted a new revenue procedure for taxpayers to apply for relief from late elections. This new revenue procedure is effective September 3, 2013. While the revenue procedure applies to other similar elections, such as a Qualified Subchapter S Subsidiary election, this article will only focus on S-Corp elections.
For an S-Corp election be timely for a particular tax year, the corporation must file for the election on or prior to the 15th day of the 3rd month following the start of the year. So, for a company already in existence that wants to elect S-Corp status for a particular year, the election must be made on or prior to March 15 of that year. For a newly formed company, the corporation has until 75 days from the incorporation date to make the election.
Failure to file the election by the appropriate deadline would result in the IRS not treating the corporation as an S-Corp. Late, or nonfiling, corporations could remedy that situation by following what was previously a maze of procedures. The new revenue procedure supersedes the previous procedures and simplifies the method for taxpayers to apply for relief from a late election.
Under the new procedure, corporations that failed the make a timely S-Corp election may file their election within 3 years and 75 days after the date the election was intended to be effective. For example, if a corporation intended to elect to be taxed as an S-Corp on January 1, 2013 but failed to file its election, the corporation can obtain late relief by filing the election any time before March 15th, 2016.
Additionally, the new procedure provides that S-Corps that meet the following requirements are not subject to the 3 year 75 day deadline, but instead of have no time limit on requesting relief:
- The corporation is not seeking a late corporate entity classification;
- The corporation fails to qualify as an S-Corp solely because its election was not timely filed;
- The corporation and all of its shareholders reported their income consistent with S-Corp status for the year the election should have been made and all later years;
- At least 6 months have passed since the corporation filed its first S-Corp year tax return;
- The IRS did not notify the corporation and the shareholders of any problem with the S-Corp status within 6 months after the return was filed; and
- The completed election form includes statements from all shareholders from the date the election was to have been effective to the date of the filing stating that they have reported their income consistent with S-Corp status.
In basic terms, this means that there is no time limit on how far back a corporation can make a late S-Corp election effective, provided it has always filed taxes as an S-Corp, the shareholders have reported the income as if the corporation was an S-Corp, and the IRS had not notified the corporation that its election was never filed.
Please not that this is article is not intended as tax advice, and is merely a brief summary of one change to the IRS procedures for election by a corporation to be treated as an S-Corp.
Should you need assistance with your company’s tax election or any other laws that may affect your business, or would like to schedule a free initial consultation, please contact Waltz, Palmer & Dawson, LLC at (847)253-8800 or contact us online.