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03 / 13 / 2015 by Greg Freyman, CPA in Business Tax

Filing For S Corporation Late Election Relief

Many existing C Corporations and new businesses elect to be taxed as an S Corporation. However, some of these businesses fail to meet the filing deadline, which is 75 days after incorporating or 2 months and 15 days after the beginning of the tax year. So, established businesses must file by March 15 of the new tax year, or before. New businesses must file by March 15. Fortunately, there are exceptions to this rule in which businesses may qualify for late election relief.

What is an S Corporation?

An S Corporation is one of the tax structures a business can opt to file with because it provides unique benefits, including corporate tax returns. There are specific criteria requirements in order to be considered for this filing status, so be sure to be informed about what it entails before filling in the necessary documents. However, this process need only be completed once and will remain valid every following year, even if new shareholders do not consent.

HOW DOES A BUSINESS ELECT TO BE TAXED AS AN S CORPORATION?

The company will need to have an officer and all associated shareholders sign a Form 2553 and then file it with the IRS to elect to be taxed as an S Corporation. After this is completed, the IRS sends a CP261 Notice to businesses to confirm acceptance of the S Corporation election. If the business owner and/or accountant did not receive the letter or do not have a record of it, they should contact the IRS directly at their Business and Specialty Tax Line at (800) 829-4933 (M-F, 7 am-7 pm).

HOW TO QUALIFY FOR S CORPORATION LATE ELECTION RELIEF

If a company fails to timely file the form with the IRS to elect to be taxed as an S Corporation, it may still be eligible for a late election to be an S Corporation. However, the company must show that failure to file Form 2553 on time was the result of a reasonable cause. The IRS has two acceptable forms of reasonable cause: (1) a company’s president, chief executive officer, or similar responsible person neglected to file the election, and (2) that the corporation’s tax professional or accountant neglected to.

If a company does not file the Form 2553 on time, but still meets the late election relief criteria in IRC Section 1362(b)(5) detailed below, the next steps should be to file the IRS Form 2553. When filing the form, write at the top of the form the following words: “FILED PURSUANT TO REV. PROC. 2013-30.” Furthermore, if you make the election with your first tax return, write in the top margin of the first page of Form the 1120S “INCLUDES LATE ELECTION(S) FILED PURSUANT TO REV. PROC. 2013-30.

The Corp. meets the S-Corp. eligibility criteria:

  1. The corporation intended to be classified as an S corporation as of the date entered on line E of Form 2553;
  2. The corporation fails to qualify as an S corporation on the effective date entered on line E of Form 2553 solely because Form 2553 was not filed by the due date
  3. The corporation has reasonable cause for its failure to timely file Form 2553 and has acted diligently to correct the mistake upon discovery of its failure to timely file Form 2553
  4. Form 2553 will be filed within 3 years and 75 days of the date entered on line E of Form 2553

Please note that to request late election relief when the above requirements are not met, the corporation generally must request a private letter ruling and pay a user fee in accordance with Rev. Proc. 2014-1, 2014-1 I.R.B. 1.

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