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The election to be treated as an S-corporation is a significant decision for many businesses. However, sometimes due to various reasons, businesses might miss the deadline to file Form 2553. Fortunately, the IRS provides relief for businesses that have failed to make a timely S-Corp election
Form 2553 is used by LLCs or corporations to make an election to be treated as an S-corporation.
The primary advantages of an S-corporation are:
Criterion | Description |
---|---|
Entity Type | Must be a domestic corporation or eligible LLC. |
Shareholder Limit | Up to 100 shareholders allowed. |
Shareholder Eligibility | Shareholders must be U.S. citizens or residents; certain trusts and estates are permissible. |
Stock Classes | Only one class of stock permitted. |
A late election is when a business entity files Form 2553 after the deadline has passed. The deadline for filing Form 2553 is typically within 75 days of forming the business entity or March 15 of the following year. If a business misses the deadline, it may still apply for S corporation classification through the late filing of the form.
A late election to be an S corporation generally is effective for the tax year following the tax year beginning on the date entered on line E of Form 2553. The IRS provides relief for the late filing of Form 2553, and a qualifying entity may request late election relief when the election wasn’t filed in a timely manner or there was a mistake on the form. To qualify and receive retroactive tax treatment, the business entity must file for a late S corporation election up to 3 years and 75 days after its proposed effective date.
Businesses may encounter various challenges that result in missing the deadline for filing Form 2553. Here are the most common reasons and their potential impact:
To qualify and receive retroactive tax treatment, the business entity must meet the following eligibility requirements:
If a business fails to file Form 2553 and does not qualify for relief, it will be treated by default, such as a single-member LLC (SMLLC) or C-corporation for tax purposes.
This can result in overpaid self-employment tax for SMLLC or double taxation for C-Corp – once at the corporate level and again when distributed to shareholders.
Making an S-Corp election is a crucial decision that can have significant tax implications for a business. While the IRS relieves late elections, it’s essential to be proactive and ensure timely filing. If you’ve missed the deadline, take corrective action immediately. Feel free to contact us below if you need help with late S-Corp election. We are happy to assist.
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