Many times a business will be established as a corporation for liability or other purposes but the owners want the entity to be treated as a pass-through for federal income tax purposes. To accomplish this tax treatment, the corporation must make an election to receive this treatment. To make an S Corp election, the entity must be an eligible domestic corporation, have a single class of stock, have 100 or fewer shareholders, and all of the shareholders must be individuals that qualify for S Corp treatment (U.S. citizens or Resident Aliens). The actual procedure for making the S Corp election is the following:
- File Form 2553 with the IRS within two months and 15 days from the beginning of the tax year that the election is to take effect. Thus, an election in effect for tax year 2017 would have been made on or before March 15, 2017. To be effective in 2018, it should be filed by March 15, 2018.
- If it is the first year of operation of the corporation, Form 2553 should be filed within two months and 15 days of when the corporation started business.
- All of the shareholders at the time of the election must be U.S. citizens or Resident Aliens and they must all sign the election at the time it is filed. In addition an officer of the corporation must sign the Form 2553.
Once Form 2553 is approved by the IRS, the corporation will then be sent Notice CP-261 which has the effective date of the election. This Notice CP-261 can be used to rectify any errors in the IRS’ records that the corporation is not entitled to file as an S Corp. However, in the event that the entity has not timely made an S Corp election, the entity may have to seek relief for a late filing. For more information on correcting a late filing see Revenue Procedure 2013-30 and the TaxSlayer Pro Knowledgebase.