Late S-Corp Election: Reasonable Cause Example

 

Are you stressed because you forgot to file an S-Corp election for your business? Don’t.

In today’s post, I’ll walk you through how to file a late S-Corporation election. I’ll also share with you my top-secret reasonable cause for filing late that has never been rejected by the IRS.

Why would I need an S-Corp election?

If you’re already incorporated, there are several reasons why you might want to file for an S-Corp election to obtain S-Corporation status. The biggest advantage to having S-Corp status is that your business will no longer pay corporate taxes on all of the income it generates. Instead, some of that income will be distributed to the owner(s) (that’s you!) and taxed on your individual income tax return.

This is called pass-through taxation, and it allows you to only pay self-employment taxes on the salary your business pays you rather than pay those taxes on the total amount of profit your business brings in. In other words: You can save big money!

If you’re not sure if your business can or should file an S-Corp election, make sure you read my complete guide to the advantages and disadvantages of owning an S-Corporation.

When is my S-Corp election considered late, and how late is too late?

To be considered on time by the IRS, your S-Corp election needs to be filed prior to 2 months and 15 days after the beginning of your business’ fiscal year or prior to 2 months and 15 days after the date your business became incorporated (if newly incorporated).

The great news is that you have up to 3 years and 75 days from the date you intended to elect to become an S-Corp to get your S-Corp election paperwork to the IRS!

How do I file a late S-Corp election?

You’ll file for a late S-Corporation election the same way you would if you were filing on time, but there are some extra steps you’ll need to take. Here’s the process:

  1. Download Form 2553, Election by a Small BusinesS-Corporation, and complete all necessary fields. This includes having all of your business’ officers and shareholders (if applicable) sign the form and choosing a fiscal tax year for your business.
  2. On line I of your Form 2553, explain your reasonable cause for filing a late election. Keep reading for my top-secret-never-been-rejected reason.
  3. Either attach the form to your Form 1120-S, Income Tax Return for an S-Corporation, and mail those forms in together, or mail it separately to the correct IRS address indicated on the Form 2553. Which address you use is based on the state where your business is located.
  4. If you are attaching your Form 2553 to your Form 1120-S, you must write this in the top margin of the first page of your Form 1120-S: “INCLUDES LATE ELECTION(S) FILED PURSUANT TO REV. PROC. 2013-30.” If you are filing Form 2553 on its own, you must write this in the top margin of the first page of the form: “FILED PURSUANT TO REV. PROC. 2013-30.”

What is reasonable cause to file a late S-Corp election?

Basically, the IRS says that if you have been operating like an S-Corporation anyway but just forgot to file the paperwork that would make you an “official” S-Corporation, they’re likely going to let you slide. It is important that your business has reported and filed all income tax returns with the IRS since the time you should have elected to become an S-Corporation.

Now, let’s get to the top-secret reasonable cause example that I’m sharing with you today. Here’s the reason that has never been rejected by the IRS (drumroll, please): “The information necessary to make an informed decision about the entity’s status was not available in time to file a timely election.” If you write that on line I of your Form 2553, you should be good to go as long as you’ve completed all other necessary steps for becoming an S-Corporation.

How will I know if my S-Corp election has been approved?

You should be notified within 60 days whether or not your late S-Corp election was accepted. However, if you checked the Q1 box in Part II of the Form 2553 to indicate you’re requesting a fiscal tax year based on a business purpose, then your determination may take an extra 90 days. If you haven’t heard anything and you think you should have, then contact the IRS.

When your late S-Corp election is accepted, the notification will also include the effective date.

Does my S-Corp election expire?

You do not have to file for an S-Corp status more than once for the same business unless you terminate your S-Corp status or the IRS revokes your status for some reason. In other words, there’s no expiration or end date given for an S-Corp status.

What else do I need to do to become an S-Corporation?

I’ve written a complete guide that includes a list of what you’ll need to become an S-Corp. If you have more questions about how to get started and would like some expert advice, feel free to contact me. Make sure you look through my other posts for S-Corporation owners that I’ve written to help my small business clients like you.

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Amy Northard, CPA

The Accountant for Creatives®
+ taxes + bookkeeping + consulting
+ Hang out with me over on Instagram!

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