Whenever you decide on making an S election, the timing is pretty important. There are some very specific rules about when you actually have to file your S corp election so you need to have knowledge of the filing requirements in order to make a plan.
Timing of the S Election
If you just started your business, then you have two months and 15 days to file Form 2553 to make the election. For example, if your business started on June 15th, then you have until August 30th to file the necessary documents.
If this is not your first year of business, then you have until March 15th to file Form 2553 for the S election to take effect for the current year. For example, if you make the S election on March 15th, 2019, then it would take effect as of January 1st, 2019.
Additionally, making an S election any time the year before your desired beginning year would take effect as of January 1st. For example, you made an S election on October 11th, 2019. This S election would take effect as of January 1st, 2020.
Late S Elections
You’re probably thinking to yourself, “Hey, I know that it’s possible to do better than that!”, and yes, you’re correct. Nowadays, you can make the S election up to 3 years and 75 days after the effective date.
With any late election, you will have to show that you intended for the company to be an S Corp from the start. You will also need to have some reasonable cause to justify the late filing. Additionally, tax filings of each shareholder must have been filed as if the business was an S Corp (at least from the effective date of the election).
These requirements are not difficult to handle, but you still should consider choosing an effective date that will cause you the least amount of hassle with the greatest tax advantage.
In many cases, the IRS will accept a late S election. However, that can always change. With potential legislation changes and changes to the political climate, you just never know what can happen.
Wrapping It Up
If your business decides that making a late S election is the right choice, then the sooner, the better. The process can be tedious to say the least. The IRS won’t even speak with you about it until at least sixty days have passed since your filing date so you better get going.
Whatever you choose, it’s important to contact a tax or accounting professional to help you make the best decision for your business.
Note: This blog post is meant for educational and informational purposes only. Please contact a tax or accounting professional if you have specific questions about what this means for your business before taking any further action. Also note that these questions are not exhaustive.