Electing S-Corp Filing Status, Retroactive for 2020
By Jason Watson, CPA
Posted February 28, 2020
Yes, you are able to engage in revisionist history and retro activate your S Corporation election to January 1, 2020, and have your income avoid a large chunk of self-employment taxes. Which year? Good question, and Yes, of course, it depends. First things first. You must be eligible to become an S Corp for taxation purposes-
- you must have an LLC, partnership or C Corp already in place,
- your entity must be domestic,
- have 100 or fewer shareholders,
- have shareholders who are individuals, estates or exempt organizations, and not have any non-resident alien shareholders, and
- have only one class of stock (you are allowed to have voting and non-voting as one class)
There some other devils in the details, but 99% of the LLCs, partnerships and C Corps out there qualify.
If you do not have an entity already in place, there are organizations that sell shelf businesses. Note the word shelf- not shell. These shelf businesses have EINs, file tax returns and all their history sits on a shelf hence the name shelf company. How this works is beyond our book and usually requires a conversation.
Late S Corp Election, Oops
Form 2553 (the S Corp election form) must be filed with the IRS. It is typically due within 75 days of forming your business entity or March 15 of the following year. However in typical IRS fashion there are 185 exceptions to the rule and the late S corporation election is another example. The IRS provides relief for the late filing of Form 2553. Historically, IRS Revenue Procedures 2003-43 and 2004-48 were the governing rules but the IRS has simplified it (imagine that!).
IRS Revenue Procedure 2013-30, effective September 3 2013, allows an entity to get relief and elect S Corp status within 3 years and 75 days from the date the election was originally intended to be effective. Holy cow. Three years!
The IRS is basically saying that if you walk and smell like an S Corp, then you are an S Corp.
So, if it is November 2020, and you want to go back to January 1, 2020, no problem. If it is March 2021 (tax season) and you are freakin’ out because you forgot to make the election earlier, you can still go back to January 1, 2020. No that is not a typo… we are talking about going back to the previous year’s January 1!
There are hiccups. Isn’t hiccups such a friendly word? Sort of like bumps in the road. Bruises is another word that is about as hollow as hiccups and bumps. No one says pitfalls or disasters anymore, just hiccups. Bottom line is we can engage in some revisionist history on March 1, 2021 and create an Officer Compensation event for December 31, 2020. No worries.
If your current CPA or tax professional says No, we suggest you find a new accountant. WCG has been doing this for over a decade (there was relief provisions prior to the 2013 IRS Rev Proc as well) without major problems. You might incur some late filing penalties which usually can be abated under the First Time Abatement statutory relief program. We will review on a case by case basis.
Once the facts and circumstances are reviewed, and everyone thinks the S Corp election is the way to go, there are three things that happen simultaneously-
- Fax Late S Corp Election Form 2553 to the IRS, Fee: $375
- Open Payroll Accounts for 2021, Fee: $300 to $450 (depending on state, OH and PA are the worst, super yuck)
- Issue a 1099-MISC as Officer Compensation (in lieu of a late payroll), Fee: $450 (this includes tax planning and estimated tax calculations)
- Prepare S Corporation Tax Return on Form 1120S, Fee: $800 to $1,200
So about $2,000 give or take a few bucks however you will be saving anywhere from 8% to 10% of your net business income depending in your situation. Also remember that the late S Corp election and payroll account setup is a sunk cost. In other words, you would need these things done regardless of late S Corp election for the previous year or waiting until next year. Bite the bullet now. Get it done.
In the past, to obtain relief with a late S Corp election during the tax season, we would prepare and file Form 1120S (corporate tax return) and attach Form 2553 (S Corp election) to it. Today, there are two paths. If we can file the S Corp tax return (Form 1120S) by March 15, then we send off the Form 2553, wait for the IRS to approve and then efile the tax return. New school.
Conversely, if we cannot file the tax returns in a timely manner, we usually have to paper-file the tax returns along with Form 2553. This is the old school way and there are times it is the only way.
Everyone once in a while the IRS loses its mind and rejects the late S Corp election. We always get it pushed through. Always. Unfortunately the rejection or some other nasty gram of a notice arrives on your doorstep at 5:01PM on a Friday. Briefly freak out, send the documents to us, and then have a Coke and a smile- it’ll be OK.
At the very worst we have to obtain a Power of Attorney from you, call the IRS and give them a “see… how it works is…” spiel. We have a 100% success rate in getting these three events pushed through. Your mileage might vary, but we are also very successful with getting late payment penalties abated with the IRS. Each state is different, and some are unsympathetic. Again, the savings will outweigh the costs (or we wouldn’t let you do it).
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