Timing an S Corporation Election

Deciding to operate a business as an S corporation is usually a pretty simple decision to make because S status often saves a business thousands of dollars in taxes a year.

Unfortunately, business owners often find the S corp timing rules confusing. The basic rule-- elect by day fifteen of month three--only sounds simple.

Determining the S Election Deadline for a Corporation

For corporations, the deadline can be easy to pinpoint. for instance, if a corporation making the S election exists on January 1, the S election requires to be made by March 15 of that same year. In other words, March 15 is the fifteenth day of the third month of the year.

March 15 isn't always the election drop-dead date, even so. for instance, if a new corporation is formed on February 1, February is the first month of the first year. In this case, April is the third month and then the S election may in reality be made as late as April 15.

Determining the S Election Deadline for a restricted Liability Company

And here's additional wrinkle which confuses the otherwise simple arithmetic: While a corporation would need to make an S election by the fifteenth day of the third month of its tax year (as noted in the preceding two paragraphs), the rules often work differently for LLCs.

An LLC, if it is not (nevertheless) being treated as a corporation, is treated as a sole proprietorship or a partnership. When the restricted liability company elects Sub S status, that election determines the embark on of the corporation's first tax year. What this usually means is an LLC can usually "go back" any time during the year.

An illustration shows how this can work. Suppose you operate an active trade or business as a restricted liability company and have done so for years. Further suppose that you used the default tax accounting classification (which means either a sole proprietorship or partnership depending on the number of owners).

Any time in the current year, you are able to elect to go back in time as long as the effective S corp date nonetheless meets the 15th-day-of-3rd-month rule. for instance, if you make an election by March 15, you are able to make your election effective on January 1. That election date is also considered to be the incorporation date and so the first day of the tax accounting year. In this case, the business's income and deductions for the entire year are reported on the S corporation tax return.

you are able to also make an election later in the year. for instance, you might decide on April fifteenth to make the S election. Now you have to nonetheless follow the fifteen-day-of-the-third-month rule. But if you specify the Sub S effective date as February 1, that works. In this case, the business's income and deductions for January would be reported as a sole proprietorship (on a Schedule C form inside the proprietor's 1040 form) or as partnership (on a 1065 partnership return). But the business's income and deductions for the remainder of the year (February through December) would be reported on the S corporation tax return.

Early Subchapter S Elections Often an Option

The roughly 75 day countdown often makes folks think they have to make an election early in the first year for which the entity wants to operate as an S corporation. But that's not in reality true.

you are able to elect S status up to twelve months in advance. Accordingly, if you know for sure that you want your business treated as an S corporation next year, you may as well make the election this year.

Making Late S Corporation Elections

And one final point: With a good excuse, the IRS often forgives folks for making late S elections. In other words, you are able to often combine pleading and a bit of whining with a late S election and nonetheless achieve success.

Note, even so, that you nonetheless need an eligible entity for which to make the election. In other words, you are able to't form a restricted liability company on, say, June 1 and so six months later elect S status effective twelve months earlier. You could at best only make a 180-date-late S election effective on June 1.

Tip: The IRS issues revenue procedures (aka instructions) that you need to religiously follow if you prefer to make a late S election. Be sure, so, to find and use the most recent revenue procedure (or get a CPA's help) if you prefer to try making a late S election.