How To File For Late A S Corp Election

Written by admin on October 11th, 2011

S corporations or S corps is one of the two most popular forms of business legal structures in the state of Illinois, the other being the Illinois LLC, and for a good reason. And that reason is the fact that an Illinois S corp is considered to be a “pass-through” entity, wherein items of income or loss, deductions and credits are passed through to the corporation’s shareholders based on their ownership percentages.

Being a pass-through entity also gives the protection against double taxation common against other types of business legal structures. So if you are having doubts of starting an S corp election, the reasons we’ve mentioned should give you enough motivation to do so.

If you have already elected your business in Illinois as an Illinois LLC or other type of legal structure, you can still change it into an Illinois S corp through a late S corp election. To do this, your business must meet the following criteria:

The business meets all the Illinois S corp eligibility criteria

The business intends to be classified as an S corporation as of the intended effective date of the S corp election

The business fails to qualify as an S corp for the sole reason that its members failed to file the Form 2553 (i.e. the form used to file an S corp election) on time

Less than 24 months have passed since the original due date found on the Form 2553
The business has either a reasonable cause to fail to file the Form 2553 on time or has inadvertently failed to do so.

The business has yet to file tax returns for the first tax year for which it intended to switch to being an Illinois S corp, or it has filed a tax return using Form 1120S and the shareholders reported their share of income accordingly and in line with the intention of the business to hold an S corp election.

The Form 2553 has been filed not later than 6 months after the due date (regardless of extension) of the first tax return for which the business intends to hold an S corp election.

Shareholders and other taxpayers involved in the business have yet to report their income in manner that is not consistent with the business’s intention to hold an S corp election.

If your business meets these requirements, you should be able to file a Form 2553 by writing at the top of the form the following words: FILED PURSUANT TO REV. PROC. 2003-43. You must also attach a statement indicating that your business had a reasonable cause or had inadvertently failed to file the Form 2553 on time. Both the form and the attache3d statement should also be signed by each and every member involved in the S corp election.

If your business elects to become an Illinois S corp for federal tax purposes but is not a corporation during the time of the filing, you will have to file an IRS Form 8832 as well. If you wish to switch your new Illinois LLC into an S corp, for example, you will have to file a Form 8832 along with your Form 2553. The requirements for eligibility to file a Form 8832 is the same as filing the Form 2553, with the added requirement that you are filing a late S corp election because you have failed to file the Form 8832 in a timely manner.

Regardless of whether it is Form 2553 or Form 8832, the reason why you failed to file these forms is of “reasonable cause”. This reasonable cause is decided solely by the IRS on a case-to-case basis. Also, if you want retroactive relief for these defects in order to hold an S corp election, you should file an IRS Form 2553 with the following words at the top of the form “FILED PURSUANT TO REV. PROC. 2004-48” and attach a statement explaining why you should be granted relief.

Because the paperwork required for filing a late S corp election is usually more than if you were to file LLC paperwork, some entrepreneurs tend to give up on turning their businesses into an Illinois S corp. But as the old saying goes: “no pain, no gain”. And if you are unwilling to spend some effort to switch your business to an S corporation, your competitors who are structured as S corp will have an advantage over you tax-wise.

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