You Forgot to File an S-Election

An S corporation is a flow through entity under the tax code. Instead of the corporation paying its own taxes, the liability “flows through” to the shareholders.  They report the activity and pay the taxes on their tax returns.

While the exact requirements are beyond the scope of this post, one of the things you have to do is apply for the election. You do that by filing form 2553 within 2 ½ months of the start of the first S Corp tax year. What happens if you miss the deadline? If you otherwise qualify as an S corporation, the IRS will often accept a late filed election. Rev Proc 2013–30 lays out all of the criteria, but you have do the following:

  1. Prepare the 2553
  2. Attach a statement to the 2553 explaining why you were late
  3. Have an officer and all the shareholders sign the form.

A few important points – first, the IRS lays out specific requirements for the statement mentioned in #2 above (see section 4.03(3) of Rev Proc 2013–30). Second, the term “shareholders” in #3 includes anyone who was a shareholder during the first year that the S election would be effective. That means that someone who was a shareholder at the beginning of the year, but left before the 2553 was filed must also sign the election.

That covers the IRS, but what about New York State?

Since I practice in New York, I only describe the New York implications of late filed S elections. State requirements vary so please don’t ignore your own state.

New York requires form CT-6 from an S corporation. CT-6 is the NYS equivalent of the federal 2553. Both forms carry the same deadline, so if you miss one you missed them both. In that case, you must first obtain approval from the IRS. After you get it you can file the CT-6 late together with a copy of the 2553 and the approval letter you receive from the IRS.

Its not uncommon for an S corp to miss the deadline for filing the S election. How do I know this, because it happens often enough to warrant special rules issued by the IRS. Rev Proc 2013–30 lays out the procedure, but the general rule is that if the IRS is unharmed by the your claim for S status, they will allow it.

 

Sources:

http://www.tax.ny.gov/pdf/memos/multitax/m98_4c_2i.pdf

http://www.irs.gov/irb/2013-36_IRB/ar12.html#d0e753

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Late-Election-Relief

For more information, contact our office.

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