Timing an S Corporation election

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Deciding to operate a firm as an S corporation is regularly a pretty easy decision to make because S status often saves a firm thousands of dollars in taxes a year.

Unfortunately, firm owners often find the S corp timing rules confusing. The basic rule-- elect by day fifteen of month three--only sounds simple.

Form 1040 Instructions

Determining the S choosing Deadline for a Corporation

Timing an S Corporation election

For corporations, the deadline can be easy to pinpoint. For example, if a corporation making the S choosing exists on January 1, the S choosing needs to be made by March 15 of that same year. In other words, March 15 is the fifteenth day of the third month of the year.

March 15 isn't always the choosing drop-dead date, however. For example, if a new corporation is formed on February 1, February is the first month of the first year. In this case, April is the third month and so the S choosing may no ifs ands or buts be made as late as April 15.

Determining the S choosing Deadline for a limited Liability Company

And here's someone else wrinkle which confuses the otherwise easy arithmetic: While a corporation would need to make an S choosing by the fifteenth day of the third month of its tax year (as noted in the preceding two paragraphs), the rules often work differently for Llcs.

An Llc, if it's not (yet) being treated as a corporation, is treated as a sole proprietorship or a partnership. When the limited liability firm elects Sub S status, that choosing determines the start of the corporation's first tax year. What this regularly means is an Llc can regularly "go back" any time during the year.

An illustration shows how this can work. Suppose you operate an active trade or firm as a limited liability firm and have done so for years. Further suppose that you used the default tax accounting classification (which means either a sole proprietorship or partnership depending on the number of owners).

Any time in the current year, you can elect to go back in time as long as the effective S corp date still meets the 15th-day-of-3rd-month rule. For example, if you make an choosing by March 15, you can make your choosing effective on January 1. That choosing date is also considered to be the incorporation date and therefore the first day of the tax accounting year. In this case, the business's revenue and deductions for the entire year are reported on the S corporation tax return.

You can also make an choosing later in the year. For example, you might decree on April fifteenth to make the S election. Now you must still supervene the fifteen-day-of-the-third-month rule. But if you specify the Sub S effective date as February 1, that works. In this case, the business's revenue and deductions for January would be reported as a sole proprietorship (on a program C form inside the proprietor's 1040 form) or as partnership (on a 1065 partnership return). But the business's revenue and deductions for the remainder of the year (February straight through December) would be reported on the S corporation tax return.

Early Subchapter S Elections Often an Option

The almost 75 day countdown often makes population think they must make an choosing early in the first year for which the entity wants to operate as an S corporation. But that's not no ifs ands or buts true.

You can elect S status up to twelve months in advance. Accordingly, if you know for confident that you want your firm treated as an S corporation next year, you may as well make the choosing this year.

Making Late S Corporation Elections

And one final point: With a good excuse, the Irs often forgives population for making late S elections. In other words, you can often merge pleading and a bit of whining with a late S choosing and still achieve success.

Note, however, that you still need an eligible entity for which to make the election. In other words, you can't form a limited liability firm on, say, June 1 and then six months later elect S status effective twelve months earlier. You could at best only make a 180-date-late S choosing effective on June 1.

Tip: The Irs issues revenue procedures (aka instructions) that you need to religiously supervene if you want to make a late S election. Be sure, therefore, to find and use the most modern revenue policy (or get a Cpa's help) if you want to try making a late S election.

Timing an S Corporation electionTax Help : Who Must File a Tax Return? Tube. Duration : 1.30 Mins.

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