Correcting a Late S Corporation Election

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Jason B. Freeman

Jason B. Freeman

Managing Member

214.984.3410
jason@freemanlaw.com

Mr. Freeman is the founding member of Freeman Law, PLLC. He is a dual-credentialed attorney-CPA, author, law professor, and trial attorney.

Mr. Freeman has been named by Chambers & Partners as among the leading tax and litigation attorneys in the United States and to U.S. News and World Report’s Best Lawyers in America list. He is a former recipient of the American Bar Association’s “On the Rise – Top 40 Young Lawyers” in America award. Mr. Freeman was named the “Leading Tax Controversy Litigation Attorney of the Year” for the State of Texas for 2019 and 2020 by AI.

Mr. Freeman has been recognized multiple times by D Magazine , a D Magazine Partner service, as one of the Best Lawyers in Dallas, and as a Super Lawyer by Super Lawyers, a Thomson Reuters service. He has previously been recognized by Super Lawyers as a Top 100 Up-And-Coming Attorney in Texas.

Mr. Freeman currently serves as the chairman of the Texas Society of CPAs (TXCPA). He is a former chairman of the Dallas Society of CPAs (TXCPA-Dallas). Mr. Freeman also served multiple terms as the President of the North Texas chapter of the American Academy of Attorney-CPAs. He has been previously recognized as the Young CPA of the Year in the State of Texas (an award given to only one CPA in the state of Texas under 40).

Federal law generally recognizes two types of corporations for tax purposes: C Corporations and S Corporations. Certain entities can elect to be taxed as an S Corporation.[1] The distinction between C and S corporations is a federal tax concept–state law otherwise generally governs the other aspects of corporations as legal entities.

 

An S Corporation election requires the consent of all shareholders (or members, if an LLC is electing S-corporation status). Depending on when the election is made, the IRS will tax the corporation as a S Corporation either (1) beginning in the following tax year, or (2) beginning in the year that the election is made, if an election is made before the fifteenth day of the third month of the taxable year.[2] Generally, failure to file for S election before the fifteenth day of the third month bars the corporation from being treated as an S corporation during that year.[3] The Internal Revenue Code (IRC), however, provides exceptions to this rule when the failure to make a timely election was due to reasonable cause.[4] If this exception applies, the election becomes effective in the tax year it was intended to go into effect.[5]

While the S election statute does not specify precisely what constitutes reasonable cause, the IRS has issued guidance as to what must be demonstrated in order to receive relief for a late or nonexistent S election. Under this streamlined relief, not only must the S corporation demonstrate reasonable cause for its late or nonexistent election, but it must also have acted during that tax year as if the election had gone into effect. Thus, the entity and its shareholders must have reported income from the intended date of election as if reporting for an S Corporation.[6]

This streamlined exception is not available for an unlimited period of time. Under the guidance,  among other steps, the entity must file for a corrective election using Form 2553 within three years and 75 days of the intended effective date of election.[7] This period may be extended, however, for corporations that failed to make a timely S election but reported income as if S election had gone into effect as long as (1) six months have passed since the corporation filed its first tax return as an S Corporation, and (2) the IRS failed to notify the corporation or its shareholders of any problems regarding its S Corporation status during this six-month period. This exception does not apply to entities that are also making a corporate classification election (e.g., LLCs making a corporate election in addition to S election).[8] This narrow exception often will not apply, as the IRS will generally notify entities of a deficient filing once the entity’s first tax return is rejected during processing.[9].

Taxpayers seeking relief from failing to make a S corporation election should seek legal advice from a tax attorney.

Freeman Law’s tax attorneys are available to assist with late S corporation elections and submission of IRS Private Letter Rulings (PLRs). Call today at (214) 984-3410 or contact us online for a consultation.

 

[1] See I.R.C. § 1362.

[2] I.R.C. § 1361(b)(1).

[3] See id. at § 1361(b)(3).

[4] Id. at § 1362(b)(5)(B).

[5] See id. at § 1362(b)(5); see Rev. Proc. 2013-30, 3 (I.R.S. Aug. 2013) [hereinafter “Revenue Procedure”].

[6] See Revenue Procedure at 20.

[7] See id. at 17-19.

[8] Id. at 21-22.

[9] Late Election Relief, Exception to the 3 Years and 75 Days Rule, https://www.irs.gov/businesses/small-businesses-self-employed/late-election-relief.

Business Litigation Attorney

Need assistance in managing the business tax audit process? Freeman Law’s representations include disputes involving a variety of claims, such as breaches of fiduciary duty, business torts and other commercial disputes, partnership disputes, misrepresentation, deceptive trade practices act (“DTPA”) violations, tortious interference, extortion, Texas Theft Statute violations, civil conspiracy, and cyber and computer violations. We offer value-driven services and provide practical solutions to complex tax issues.  Schedule a consultation or call (214) 984-3410 to discuss our business litigation services.