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Electing S-Corp Filing Status, Retroactive for 2023
By Jason Watson, CPA
Posted Tuesday, October 31, 2023 (boo!)
Yes, you are able to engage in revisionist history and retro activate your S corporation election to January 1, 2023, and have your income avoid a large chunk of self-employment taxes. 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 (basically an entity that is recognized by your state’s Secretary of State),
- 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 for an S Corp election.
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, with an f, have EINs and 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. In other words, it gets a bit hairy.
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 (right around 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 2023, and you want to go back to January 1, 2023, no problem. If it is March 2024 (tax season) and you are freakin’ out because you forgot to make the election earlier, you can still go back to January 1, 2023. No that is not a typo… we are talking about going back to the previous year’s January 1!
With the preparation and filing of a late Form 2553 for your S corporation election, a reasonable cause letter must be attached. We have a template that we’ve used successfully at least 1,500 times, and we can guide you through it. Additionally, your reasonable cause cannot be “hey IRS, I just learned of this S Corp thing, and man, it sounds amazing. I would like to do this retroactively so I can save a bunch of taxes.”
Beyond the reasonable stuff, there might be other 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. The bottom line is that we can engage in some revisionist history on March 1, 2024 to take effect for all of 2023. Boom!
If your current CPA or tax professional says No, we kindly and very politely suggest you find a new accountant. WCG CPAs & Advisors has been doing this for over a decade (there was relief provisions prior to the 2013 IRS Rev Proc as well) without major problems. Given the timeline as it compares to the filing deadlines, you might incur some late filing penalties. However, these are usually abated under the First Time Abatement statutory relief program. Aside from that, the late S corporation election is straightforward.
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: $600 or $1,200 after Jan 1, 2024 which includes late filing abatement efforts since your tax return will unlikely be extended electronically. A timely filed S Corp election is $450.
- Open Payroll Accounts for 2024 (to be compliant in the future), Fee: $550 to $650 (depending on state, CA, CO, TX easier… NY and PA, rough, like a stucco bathtub)
- Issue a 1099-MISC as Officer Compensation for 2023 (in lieu of a late payroll), Fee: $650 (this includes tax planning and estimated tax calculations)
- Prepare 2023 (due Spring 2024) S Corporation Tax Return on Form 1120S, Fee: $1,500 (typically, most are $1,500)
So, you will spend about $3,200 however you will be saving anywhere from 8% to 10% of your net ordinary business income after expenses and deductions 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.
Said differently; if we isolate 2023 only, your costs are about $2,150. If you have $50,000 in net business operating income after expenses, you will still save well over $2,000 after our fee.
In the past, to obtain relief with a late S Corp election during the tax season, we would prepare and paper-file Form 1120S (corporate tax return) and physically attach Form 2553 (S Corp election) to it. Today, there are three paths-
- If we are chillin’ around Thanksgiving, then we can likely submit the S Corp election via fax and have it processed by the IRS in time for the March 15 filing. Normal ops.
- If we are after December 1, then we prepare the S Corp tax return (Form 1120S) by March 15 and we electronically attach Form 2553. Clean. Nice.
- If we are after December 1 and we are wanting to extend the S Corp tax return, then we have some problems since we cannot electronically file a tax return extension. Rather, we attempt to file the extension which will be met with a likely rejection. Next, we deal with the late filing penalty with the First Time Abatement program with a massively high 99% success rate. Messy, but common.
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 late S Corp elections pushed through. While your mileage might vary, 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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