Question

Disregarded Sole Proprietorship switch to S corp

Forum|Forum|2 years ago
August 30, 2023
2 replies
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I became an S prop (single member LLC) in May of 2022.

For half of 2022 I was paid as a W-2 employee, and for last quarter of 2022 I was paid as a1099 contractor.

I paid all taxes for 2022.

I never filed form 8832 in 2022 nor have I for this fiscal year.

Is it too late to file paperwork for S corp election for fiscal year 2023?

Despite not filing 8832 paperwork, I have been paying quarterly taxes as a disregarded single member entity for fiscal year 2023.

Not A Product Question

C

chines2

Hi @tayloredurogyn, you generally have 75 days to make an S-corp election after starting a new entity. However, the IRS will allow you to make the request at another time by providing a reason that you did not do it within the initial period. Only after the IRS has approved this election may you file as an S-Corp. You will need to use Form 2553 to make this election. You can find the application and instructions here: https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations

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LoraineG

Hi @tayloredurogyn

So it looks like you need to file a form 2553 to make the S-Corp election, however, if you file it now, it will take effect for tax year 2024 (which starts in January 2025). This is what the IRS states:

When To Make the Election

Complete and file Form 2553:

No more than 2 months and 15 days after the beginning of the tax year the election is to take effect, or
At any time during the tax year preceding the tax year it is to take effect.

For this purpose, the 2-month period begins on the day of the month the tax year begins and ends with the close of the day before the numerically corresponding day of the second calendar month following that month. If there is no corresponding day, use the close of the last day of the calendar month.

Example 1. No prior tax year.

A calendar year small business corporation begins its first tax year on January 7. The 2-month period ends March 6 and 15 days after that is March 21. To be an S corporation beginning with its first tax year, the corporation must file Form 2553 during the period that begins January 7 and ends March 21. Because the corporation had no prior tax year, an election made before January 7 won’t be valid.

Example 2. Prior tax year.

A calendar year small business corporation has been filing Form 1120 as a C corporation but wishes to make an S election for its next tax year beginning January 1. The 2-month period ends February 28 (29 in leap years) and 15 days after that is March 15. To be an S corporation beginning with its next tax year, the corporation must file Form 2553 during the period that begins the first day (January 1) of its last year as a C corporation and ends March 15th of the year it wishes to be an S corporation. Because the corporation had a prior tax year, it can make the election at any time during that prior tax year.

Example 3. Tax year less than 2½ months.

A calendar year small business corporation begins its first tax year on November 8. The 2-month period ends January 7 and 15 days after that is January 22. To be an S corporation beginning with its short tax year, the corporation must file Form 2553 during the period that begins November 8 and ends January 22. Because the corporation had no prior tax year, an election made before November 8 won’t be valid.

Verify if you qualify for a late S-Corp election. These are the rules to be eligible to do the late election:

Relief for a Late S Corporation Election Filed by a Corporation

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.

To request relief for a late election, a corporation that meets the following requirements must explain the reasonable cause for failure to timely file the election and its diligent actions to correct the mistake upon discovery. This information can be provided on line I of Form 2553 or on an attached statement.

The corporation intended to be classified as an S corporation as of the date entered on line E of Form 2553;
The corporation fails to qualify as an S corporation (see Who May Elect, earlier) on the effective date entered on line E of Form 2553 solely because Form 2553 wasn’t filed by the due date (see When To Make the Election, earlier);
The corporation has reasonable cause for its failure to timely file Form 2553 and has acted diligently to correct the mistake upon discovery of its failure to timely file Form 2553;
Form 2553 will be filed within 3 years and 75 days of the date entered on line E of Form 2553; and
A corporation that meets requirements (1) through (4) must also be able to provide statements from all shareholders who were shareholders during the period between the date entered on line E of Form 2553 and the date the completed Form 2553 is filed stating that they have reported their income on all affected returns consistent with the S corporation election for the year the election should have been made and all subsequent years. Completion of Form 2553, Part I, column K, Shareholder's Consent Statement (or similar document attached to Form 2553), will meet this requirement; or
A corporation that meets requirements (1) through (3) but not requirement (4) can still request relief for a late election on Form 2553 if the following statements are true.
1. The corporation and all its shareholders reported their income consistent with S corporation status for the year the S corporation election should have been made, and for every subsequent tax year (if any);
2. At least 6 months have elapsed since the date on which the corporation filed its tax return for the first year the corporation intended to be an S corporation; and
3. Neither the corporation nor any of its shareholders was notified by the IRS of any problem regarding the S corporation status within 6 months of the date on which the Form 1120-S for the first year was timely filed.

To request relief for a late election when the above requirements aren’t met, the corporation generally must request a private letter ruling and pay a user fee in accordance with Rev. Proc. 2021-1, 2021-1 I.R.B. 1 (or its successor).

If none of them apply, then you may try to go through the private letter ruling route. For more information, you can read more here: Instructions for Form 2553

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