LATE S ELECTIONS
Under certain circumstances a taxpayer may want to change their sole proprietorship, partnership or LLC into an S corporation. This may be done in order to minimize self-employment taxes or to take advantage of the new 20% deduction allowed for Qualified Business Income.
Generally S corporation elections must be filed (A) at any time during the preceding taxable year (in other words any time in 2018 if you are electing to be an S corporation beginning in 2019), or (B) at any time during the taxable year and on or before the 15th day of the 3rd month of the taxable year (March 15, 2019 for calendar year entities). The election is made by filing Form 2553.
What if I apply after the 15th day of the third month, is there any relief for late elections?
The good news is yes there is relief available if you’ve filed your S corporation election late and meet certain criteria.
Rev Proc 2013-30 outlines the criteria to be met and procedures to follow in case of a late S election.
The general rules of Rev Proc 2013-30 are as follows: (My comments on the rules in parentheses)
(1) The Requesting Entity intended to be classified as an S corporation as of the Effective Date of the election; (the company wants to become an S corporation)
(2) The Requesting Entity requests relief under this revenue procedure within 3 years and 75 days after the Effective Date (except in the case of certain corporations meeting additional criteria under this revenue procedure); (For a calendar year entity that wanted to be an S corporation beginning in 2019 this extended deadline would be March 15, 2022).
(3) The failure to qualify as an S corporation was solely because the Election Under Subchapter S was not timely filed by the Due Date of the Election Under Subchapter S; and
(4) In the case of a request for relief for a late S corporation election, the Requesting Entity has reasonable cause for its failure to make the timely Election Under Subchapter S and has acted diligently to correct the mistake upon its discovery.
If an entity meets all of the above criteria and follows the procedures outlined in the Revenue Procedure, then the S corporation election may be deemed as valid even though it is filed late.
Exception to the 3 Years and 75 Days Rule
Certain entities can qualify for the exception to the 3 years and 75 day rule when:
- The entity is a corporation (i.e., not a sole proprietorship, partnership or LLC seeking an entity classification election);
- The entity failed to qualify as an S corporation solely because the election was not timely field;
- The corporation and all its shareholders reported their income consistent with S corporation status for the year the S election should have been made and for every subsequent taxable year (if any);
- At least 6 months has elapsed since the date on which the corporation filed its tax return for the first year the corporation intended to be an S corporation;
- Neither the corporation nor any of its shareholders was notified by the IRS of any problems regarding the S corporation status within 6 months of the date on which the Form 1120S for the first year was timely filed; and
- The completed Election form includes the statements as described in the revenue procedure.
Although this exception exists, it is unlikely many situations will qualify since the current system is set up to notify the corporation of the problem with its filing requirement when the return rejects in processing. It could apply to a case where it did not go through normal processing.
Conclusion
This article discusses procedures to allow entities to file S corporation election forms after the due date of day 15 of the 3rd month after the effective date. Please keep in mind it is much easier to file the forms on time. This relief is to correct a situation in which that did not happen. The rules are very specific as are the procedures to be followed. I strongly suggest that if you are trying to take advantage of these provisions, then you should contact a tax professional familiar with these procedures.
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