S Corp Election
An S Corporation, which is sometimes referred to as a Sub-Chapter S Corporation, is different from a C Corporation in two significant ways.
First, although it is formed in the same manner as a C Corporation, the corporate entity makes an election with the IRS to be taxed as a “pass-through entity” under subchapter S of the Internal Revenue Code. This means that an S Corporation is not a separately taxable entity; the profits and losses are “passed-through” and reported on the personal income tax returns of the shareholders, much like a partnership.
Second, unlike a C Corporation, an S Corporation has limitations on ownership.
S Corporation Elections FAQ’s
What are the benefits of being an S Corporation?
A corporation can avoid double taxation (once to the shareholders and again to the corporation) by electing to be treated as an S Corporation. Generally, an S Corporation is exempt from federal income tax other than tax on certain capital gains and passive income. On their tax returns, the S Corporation’s shareholders include their share of the corporation’s separately stated items of income, deduction, loss, and credit, and their share of non-separately stated income or loss.
What are the requirements to becoming and/or maintaining S Corporation Status?
In order to be qualified as an S Corporation, your corporation must be filed as a U.S. corporation, maintain only one class of stock, must not have more than 100 shareholders, must be comprised solely of shareholders who are individuals, estates or certain qualified trusts, who consent in writing to the S Corporation election and have a US Social Security Number (hence, the corporation cannot have non-resident alien shareholders) and the corporation must have a tax year ending on December 31. If your corporation fails to observe any of the above requirements, you may be ineligible for S Corporation status or your S Corporation status can be revoked by the IRS at any time.
What if you miss the S Corporation election deadline?
A late election to be an S Corporation generally is effective for the tax year following the tax year beginning on the date entered on line E of Form 2553. However, relief for a late election may be available if the corporation can show that the failure to file on time was due to reasonable cause.
How to Apply for S Corporation Status
To apply for S Corporation status, your corporation must complete and file IRS Form 2553 with the Internal Revenue Service no more than two months and 15 days (75 days) from the date of incorporation in order for the election to take effect during the tax year the filing is made.
Upon receipt, the service center will notify the corporation, no more than 60 days after submission of the filing, as to whether the election has been accepted; you will also be notified if your election is not accepted.
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