Did you just realize that no one filed the one piece of paper that changed your C-corporation or LLC into an S-corporation?
The election to S-corp should have been filed the year before it applies or within 2 months and 15 days into the year it applies So, if you are an existing calendar year business, file Form 2553 by March 15, or better yet, the year before. If you are a new business, it needs to be filed within two months and 15 days of the first tax year. For example, if you started your business July 1, file by September 15. But that’s probably all past history. You missed those deadlines, so now what?
Well, there is actually a rare second chance to get the S-corporation election right. How you file does depend on certain conditions and you do need to have a good reason why the S-corp election wasn’t filed or filed correctly. In this first article about late filing S-Corp elections, I’ll cover IRS Revenue Procedure 2007-62 and who can use this very simplified method for obtaining relief.
If you have not yet filed a tax return for the first taxable year that you’re electing to be an S-corporation and you’ve been acting like an S-Corp, basically, you can file Form 2553 (the form you should have filed earlier) to make the S-corp election along with Form 1120-S, your business’ tax return. There are several requirements for late election under this simplified method, formally known as Revenue Procedure 2007-62: (You can read it here, if you’d like to wade in.)
Here’s the requirements as listed by the IRS:
- The entity fails to qualify for its intended status as an S corporation on the first day that status was desired solely because of the failure to file a timely Form 2553 with the applicable campus;
- The entity has reasonable cause for its failure to file a timely Form 2553;
- The entity seeking to make the S corporation election has not filed a tax return for the first taxable year in which the election was intended;
- The application for relief is filed under this revenue procedure no later than 6 months after the due date of the tax return (excluding extensions) of the entity seeking to make the election for the first taxable year in which the election was intended; and
- No taxpayer whose tax liability or tax return would be affected by the S corporation election (including all shareholders of the S corporation) has reported inconsistently with the S corporation election, on any affected return for the year the S corporation election was intended.
Let’s take them apart to see if you qualify for this method. First, not filing Form 2553 must be the only thing that keeps you from being an S-Corp. I take this to mean that you must not violate any of the other rules for being an S-Corp. There are several rules, including:
- Must a be a domestic corporation
- No more than 100 shareholders
- No nonresident alien shareholders
- Only one class of stock
There are a few more rules and some important details to the above rules, so if you need clarification, I suggest you check the IRS instructions for Form 2553. We’re going to assume you meet all the rules, okay?
Next, you must have reasonable cause for not filing the S-Corp election on time. What’s reasonable? Well, the definition is a bit hard to pin down… But if you can blame someone else for not doing their job that’s a great place to start.
Now if you’ve gotten this far, hopefully you have not actually filed a return for your first S-Corp year. This is the crux of using this particular method, Rev. Proc. 2007-62.
Then, let’s make sure you are within the deadline to file. This is very, very important. You must file within 6 months of when the first tax return was due, not including extensions. Thus, for most of us, the S-corp tax return would be due March 15 so the Rev Proc 2007-62 election is due September 15.
Finally comes the “honesty” clause — everyone whose taxes would be affected must have done their taxes as if the S-Corp election had been filed correctly. Did you file K-1 forms as if you were an S-corp? And did all the shareholders file their taxes (if filed) based on those forms? If yes, I think you’re covered.
Okay, if you qualify under Rev Proc 2007-62, all you have to do is file out the Form 2553 that you should have filed earlier. When Rev Proc 2007-62 was released, this form was amended to include a section for you to explain your reasonable cause for not filing a timely Form 2553 in the first place. Fill out that section, attach it to your Form 1120S, and file away! Please, please file via certified or registered mail. I’ve known too many people who did not take this small step and have no proof that the return was filed. Trust me, take the few minutes and few dollars and mail it certified.
Theorectically, you will hear from the IRS within 60 days that your S-Corp election has been accepted. If you haven’t heard in, say 90 days, call the IRS to inquire. Most businesses are successful filing a late S-Corp election using this method. Just make sure you do qualify under this method. There are other avenues that are very similar available and I will cover them in Part 2 of Late Filing Your S-Corp Election.