Missed the deadline for filing your S corp election?
So you intended to have your corporation or LLC treated as an S corporation for federal income tax purposes, but you failed to file the election by the deadline. What can you do?
Deadline for Filing S Election
Under the Internal Revenue Code (Code), a small business corporation may make an election to be an S corporation for any taxable year (A) at any time during the preceding taxable year, or (B) at any time during the taxable year and on or before the 15th day of the 3rd month of the taxable year. Most corporations must file on a calendar year basis (January 1 to December 31), which means that typically a corporation must file on or before March 15.
For a newly formed corporation, its taxable year begins when it commences business, so the filing deadline to make the election effective for its first taxable year would be two months and 15 days after it began its business. For example, if a corporation was formed on July 10 and immediately started business, the election to be treated as an S corporation for its first partial year would be due on or before September 24 (the first month of its taxable year would be July 10 to August 9, the second month would be August 10 to September 9, and the 15th day of the third month would be September 24).
The Income Tax Regulations provide that a small business corporation makes an election to be an S corporation by filing a completed Form 2553, Election by a Small Business Corporation.
The Code provides that if an S corporation election is made after the 15th day of the 3rd month of the taxable year and on or before the 15th day of the 3rd month of the following taxable year, then the S corporation election is treated as made for that following taxable year.
Relief for Missing the Deadline
The Code provides relief to taxpayers who make a late filing or fail to make the election at all. If the IRS determines that there was reasonable cause for the failure to timely make the election, it may treat the election as timely made for the taxable year.
The specific requirements for obtaining relief from the late filing are set out in Revenue Procedure 2013-36. It is important that ALL of the steps be followed. For that reason, most taxpayers should strongly consider having their attorney or accountant assist in the preparation of the Form 2553 and supporting materials to submit to the IRS.
A corporation (or an LLC for which a Deemed Entity Classification Election will apply) seeking relief for a late S corporation election must file a completed Form 2553, signed by (1) an officer of the corporation authorized to sign, and (2) all persons who were shareholders at any time during the period that began on the first day of the taxable year for which the election is to be effective and ends on the day the completed Form 2553 is filed.
The completed Form 2553 must include statements from all shareholders during the period between the date the S corporation election was to have become effective and the date the completed Form 2553 is filed that they have reported their income on all affected returns consistent with the S corporation election for the year the election should have been filed and for all subsequent years.
In addition, the following requirements must be met:
- The corporation or LLC intended to be classified as an S corporation as of the effective date of the election;
- The corporation or LLC requests relief under the revenue procedure within 3 years and 75 days after the effective date (except in the case of corporations requesting relief under Section 5.04 of the revenue procedure, in which case the time limit does not apply);
- The failure to qualify as an S corporation as of the effective date was solely because the election under Subchapter S was not timely filed by the due date; and
- The corporation or LLC has reasonable cause for its failure to make the timely election under Subchapter S and has acted diligently to correct the mistake upon its discovery.
The Reasonable Cause/Inadvertence Statement and other statements required by the revenue procedure must each contain a dated declaration that states: "Under penalties of perjury, I (we) declare that I (we) have examined this election, including accompanying documents, and, to the best of my (our) knowledge and belief, the election contains all the relevant facts relating to the election, and such facts are true, correct, and complete." An officer of the S corporation authorized to sign, or a shareholder, as applicable, must sign the declaration.
The revenue procedure provides that the requst for relief, consisting of the election and supporting materials, can be attached to the current year tax return (Form 1120S) or a prior year late filed Form 1120S, or submitted directly to the applicable IRS Service Center.
Upon receipt of a completed request for relief under the revenue procedure, the IRS will determine whether the requirements for granting additional time to file the election under Subchapter S have been satisfied and will notify the corporation or LLC of the result of this determination.
David K. Staub