Many owners discover that they have been acting like an S corporation, paying themselves a salary and filing Form 1120-S, without ever filing a valid Form 2553. That is a real and fixable problem, but only if you move carefully and in the right order.
How a normal election works
An eligible corporation or LLC elects S corporation status by filing Form 2553. In general, the election is due no more than 2 months and 15 days after the start of the tax year it is meant to take effect, or earlier. All shareholders must consent. If you miss the deadline, the entity is not an S corporation for that year unless relief applies. See LLC taxed as S corp for the basics.
What Rev. Proc. 2013-30 offers
The IRS provides a simplified method for late election relief under Revenue Procedure 2013-30. It is designed for entities that always meant to be S corporations but filed late. It does not rescue entities that were ineligible or that made no real attempt to elect.
Who may qualify
- The entity intended to be classified as an S corporation as of the effective date.
- The entity is an eligible entity: for example, it did not have an ineligible shareholder or fail the other S corporation requirements.
- The entity failed to qualify solely because the election was not timely filed.
- The entity has reasonable cause for the late filing.
- The entity and all shareholders reported their income consistent with S corporation status for the year the election should have been made and for all later years.
The time limit
According to the IRS, relief generally requires that less than 3 years and 75 days have passed since the intended effective date of the election. A narrow exception exists for certain corporations, not for LLCs seeking a classification election, that meet several conditions, including at least six months since the first timely filed Form 1120-S and no IRS notice of S status problems in that period. The IRS notes few cases are likely to qualify, so assume the standard window.
Consistent reporting is the heart of it
If you filed personal returns as though the entity were a sole proprietorship or partnership, while also claiming S corporation treatment elsewhere, the consistency requirement fails. The shareholders' returns, the entity's returns, and payroll should all tell the same story. A preparer should compare them before you submit anything. For what a properly filed return looks like, see S-corp tax return filing.
Limits on relief
- Relief covers only elections that would otherwise be valid, meaning for example all shareholders must have signed the election.
- An ineligible shareholder, or a corporation that did not qualify, during any part of the year disqualifies that year.
- If you do not qualify under the revenue procedure, the IRS lists a private letter ruling as the remaining option, which is more formal and more costly.
- For certain inadvertent invalid S elections, the National Office may grant relief under a separate Internal Revenue Code provision.
How to proceed
- 1Establish the facts: when the entity was formed, when the election should have taken effect, and what was actually filed.
- 2Confirm eligibility for every period, including shareholder eligibility and stock classes.
- 3Document the reasonable cause for the late filing.
- 4Review all returns and payroll filings for consistency.
- 5Prepare the request following Revenue Procedure 2013-30 and the current Form 2553 instructions. The IRS page we reviewed does not list the required statement wording, so follow the full text of the revenue procedure.
- 6Submit and keep proof of filing and any IRS response.
What happens without relief
If no election is valid, the entity is treated under its default classification, such as a partnership or disregarded entity for an LLC, or a C corporation for a corporation. Returns filed as an S corporation could be wrong, and payroll and distributions may need to be reviewed. That can mean amended returns. See business tax return amendments and unfiled business tax returns.
Late election relief turns on facts and timing. A mistake in the request can delay or defeat relief. Have a qualified tax professional review the facts before you file.
Our tax planning service can review your election history and filings. To schedule a business tax planning consultation, bring your Form 2553 (if any), formation documents, and recent returns. Relief is not guaranteed.
