{"id":5176,"date":"2017-10-23T04:26:37","date_gmt":"2017-10-23T11:26:37","guid":{"rendered":"http:\/\/evergreensmallbusiness.com\/?p=5176"},"modified":"2021-03-12T06:27:20","modified_gmt":"2021-03-12T14:27:20","slug":"subchapter-s-election-timing-tips-tricks","status":"publish","type":"post","link":"https:\/\/evergreensmallbusiness.com\/subchapter-s-election-timing-tips-tricks\/","title":{"rendered":"Subchapter S Election Timing Tips & Tricks"},"content":{"rendered":"

\"Picture<\/a>You want to understand how Subchapter S election timing works. Understand the timing, for example, and you avoid common mistakes. Further, understand the timing and you greatly increase your savings.<\/p>\n

The good news about timing a Subchapter S election? You\u2019ve got lots of flexibility. The bad news? That flexibility creates complexity.<\/p>\n

Fortunately, a handful of tips and tricks can make things easier\u2026<\/p>\n

S Election Timing Tip #1: Requires Eligible Entity<\/h2>\n

A first thing to know: You can\u2019t make an S election unless you have an eligible entity\u2014like a corporation or limited liability company\u2014to make the election for.<\/p>\n

This seems like an obvious point, but we do see people make Subchapter S elections for entities that don\u2019t exist.<\/p>\n

Even more commonly, we see people make a Subchapter S election with an effective date before the eligible entity exists.\u00a0For example, someone sets up a limited liability company in April of some year, but the 2553 election form<\/a> (which is how you elect Subchapter S status) sets the effective date as January 1st<\/sup> of that same year.<\/p>\n

Note:<\/strong>\u00a0Our Preparing Form 2553 blog post<\/a> explains how you make an S election for a Washington State entity, but you can use the same instructions for other states\u2019 entities, too.<\/p>\n

This premature election shouldn\u2019t work, although the IRS seems not to catch this error. But you don\u2019t want to do this. Electing Subchapter S status before your eligible entity even exists only works if the error isn\u2019t caught.<\/p>\n

S Election Timing Tip #2: Consider Early Election<\/h2>\n

You can make an early election. Specifically, if you have an eligible entity in place, you can make an election up to 12 months in advance (Source: Reg. Sec. 1.1362-6.<\/a>)<\/p>\n

For example, you could on January 1st<\/sup>, 2021 make a Subchapter S election with an effective date of January 1st<\/sup>, 2022.<\/p>\n

Electing early sometimes makes sense when you know you want to operate as an S corporation\u2026 just not before next year.<\/p>\n

S Election Timing Tip #3: Statute Says Elect Within 75 Days<\/h2>\n

You can go backwards with your Subchapter S election, too.<\/p>\n

The law, in fact, says you can elect Subchapter S status as late as the 15th<\/sup> day of the third month.<\/p>\n

This means that if the tax year starts on January 1st<\/sup>, you can elect S status as late as March 15th<\/sup>.<\/p>\n

March 15th<\/sup>, for a corporation or LLC whose tax year starts on January 1st<\/sup>, is the 15th<\/sup> day of the third month.<\/p>\n

A quick note: If you start the year at some point other than on January 1st<\/sup>, you essentially add 75 days to that start date in order to calculate the statute\u2019s required S election deadline. (Again, though, the actual statute requires the election by the 15th<\/sup> day of the third month.)<\/p>\n

S Election Timing Tip #4: Late Relief Usually Available<\/h2>\n

An exception to the statute\u2019s rule\u2026 While the actual law says<\/em> you\u2019re supposed to make your election no later than the 15th<\/sup> day of the third month, you can often make the election much later than this deadline.<\/p>\n

Currently\u2014and this has been the case for several years now\u2014you can make very, very late elections.<\/p>\n

In order to make a late election, you want to locate the most recent Revenue Procedure from the Internal Revenue Service that outlines the rules for late election relief. And then follow its instructions. (Right now, as I write this blog post, that Rev. Proc. is available here: Rev. Proc 2013-30<\/a>.)<\/p>\n

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\"Picture<\/a>Tip:<\/strong> If you’re thinking about making an S election for a business, you might also be interested in getting some expert help with setting your S corporation shareholder salaries.<\/p>\n

Set the salaries smartly, for example, and you should be able to save thousands per year per shareholder…<\/p>\n

If this is an area where you want help, take a look at our downloadable ebook, “Setting Low Salaries for S Corporations<\/a>“.<\/p>\n

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S Election Timing Tip #5: LLC Fiscal Years Start Whenever<\/h2>\n

You can use either a corporation or an LLC as the platform for a Subchapter S corporation. (I know, that seems weird\u2026 but you can.)<\/p>\n

But the deadlines and timing of the S election effective date work differently with LLCs.<\/p>\n

With a corporation, the Subchapter S election effective date is going to be either January 1st<\/sup> or the incorporation date\u2014whichever is later.<\/p>\n

If the corporation exists on January 1st<\/sup>, for example, that\u2019s the date that you would make the S election effective. And if the corporation is formed after the year starts on April 8th<\/sup>, that April 8th<\/sup> date is going to be the effective date.<\/p>\n

If you use an LLC as the platform for an S corporation, however, you can start the Subchapter S corporation\u2019s first year whenever you want. For example, though the LLC may exist on January 1st<\/sup>, you could choose to make the effective date any day of the year. Like April 8th<\/sup>. Or May 23rd<\/sup>. Or any other date.<\/p>\n

The reason for this flexibility is a little convoluted, but the basic reason is your LLC will, for the period of time prior to the S election effective date, be treated as either a disregarded entity (probably a sole proprietorship) or a partnership. And that sole proprietorship or partnership status works just fine from the IRS\u2019s point of view (and from your point of view).<\/p>\n

S Election Timing Tip #6: Revoke Elections<\/h2>\n

You can revoke a Subchapter S election (Source: Reg. Sec.1.1362-2(a)<\/a>.) You just need a majority of shareholders to agree.<\/p>\n

Some wrinkles exist, however, for revocations.<\/p>\n

First, if you do revoke, you can’t re-elect S status for five years (Reg. Sec. 1.1362-5.<\/a>)<\/p>\n

Second, when you revoke a Subchapter S election, your S corporation becomes a C corporation. You need to be careful about revocation, therefore, and make sure you understand how a C corporation works. (Please, please consult your tax advisor before doing this.)<\/p>\n

Third, just to be clear, if you used an LLC as the platform for your S corporation, note when you elected S status, the IRS on your behalf<\/em> made a deemed entity classification (Source: Reg. Sec. 301.7701-3(c)<\/a>) whereby it converted your LLC into a corporation so it could make an S election. This hidden tweak matters. Entity classification can’t be undone for at least 60 months. So that means, revoking an LLC’s S election may leave the business owners with a C corporation. At least for a while…<\/p>\n

S Election Timing Tip #7: Rescind Revocations Within 75-Day Window<\/h2>\n

You can rescind, or undo, a Subchapter S revocation as long as you rescind either before the revocation becomes effective or by the 15th<\/sup> day of the third month of the first year the revocation becomes effective (Source: Reg. Sec. 1.1362-6<\/a>.)<\/p>\n

An important point: If you rescind the Subchapter S revocation, the revocation never occurred.<\/p>\n

S Election Timing Tip #8: Intentional Terminations of Subchapter S Status<\/h2>\n

If you want to terminate Subchapter S status but cannot do so with a regular revocation for some reason, you may want to look at the option of intentionally violating the eligibility rules for Subchapter S status.<\/p>\n