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Newsletter - Winter 2008
New S Corp. Procedures
Dan Sokoloff, Supervisor, Tax & Business Services |
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For many small businesses, the requiremant to file an S corporation election is overlooked or unknown. Often this occurs because of a misunderstanding of the rules, particulary with new corporatins. Another reason may be a lack of communication as to who will file the Form 2553 (Election by a Small Business Corporation).
A corporation elects to be an S corporation by filling an S election on form 2553. The deadline for filing depends on whether the corporation id already operating as a C corporation or newly formed.
- When a Ccorporation elects to become an S corporation, S status begins on the day following the last day of the electing Ccorporation's tax year. Thus, the Selection may be filed:
- During the year preceding the first tax year the Selection is to be effective, or
- On or before the 15th day if the third month of the initial S corporation year.
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For a newly formed corporation, the election must be filed on or before the 15th day of the third month of the first tax year.
If one of the sedates is missed, there are ways to obtain relief and receive retroactive S status. Fortunately, the IRS has issued a number of revenue procedures in dicating how to correct this error, provided the correction is done within a reasonable amount of time.
The earlier the error is fixed, the more cost effective the solution can be.
Rev. Proc. 200762 may be used to correct a late filed S election if the corporation has not yet filed its first Form 1120S and/or if the error is corrected within six months of the original due date of the first Form 1120S. If relief under Rev. Proc. 200762 is not available, Rev. Proc. 200343 may provide relief if less than 24 months have passed since the original due date of the Selection, and the first Form 1120S is filed within six months of its original due date.
If neither of these procedures is available, the S corporation can request relief from a late S election by obtaining a letter ruling. In light of the number of favorable rulings issued for this problem, the chances of achieving S status using these methods are usually fairly good. However, the company will have to go through the time, expense, and uncertainty of filing the letter ruling request and will have to pay a user fee of $625, $2,500 or $10,000, based on the corporation's gross income.
Although the new revenue procedures provide more welcome relief for corporations with late filed S election, proper planning, communication and coordination is the best way to avoid this issue; therefore, at the onset of making the S corporation election, it is advisable to agree in writing when and by whom the Form 2553 will be filed.
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