March 16, 2015 is the deadline to make an S corporation election that takes effect in 2015 for companies with a calendar tax year. There is a very short period of time to make an election that is effective in the year that you make it. (You have all year to make an election that will become effective in the next year.)
You do not need to be a corporation to be an S corp. An LLC can make this election as well.
At one point, the S corporation was the only way to have business income “passed through” to the business owners’ personal tax returns. At a time when the corporation tax rates greatly exceeded individual tax rates, this was a distinct advantage. Plus, with pass-through taxation, there was no danger of being taxed twice on dividend income. Now a business owner can achieve these same goals by forming a limited liability company (LLC).
However, operating as an S corporation can provide other tax advantages that the default taxation of an LLC does not. One of the biggest tax advantages that an S corp offers is the ability to characterize income received from the business as both salary and dividends. This can significantly lower your overall tax bill. Without an S corporation election, the income passed through from an LLC is self-employment income which is reported and taxed on the owners’ returns. While employment taxes must be paid on salary, the overall amount of taxable income of the business is reduced by deductions for salary and employment taxes paid. In many cases, the savings can be significant. Your tax professional can help you balance all of the trade-offs.
If you operate your business as a corporation, rather than an LLC, keep in mind that taxation is the only difference between a C corporation and an S corporation. You will need to comply with all state laws governing corporations—maintaining a registered agent, holding annual meetings, and filing annual reports.
Whether you operate as an LLC or as a corporation, you become an S corporation by filing IRS Form 2553, Election by a Small Business Corporation. As noted earlier, you must act quickly if you want the election to take effect in 2015. March 16, 2015 is the deadline for calendar-year companies –unless your company was formed after the start of 2015. There are two exceptions to this deadline, brand-new corporations / LLCs and fiscal-year companies.
- If you are a brand-new corporation or LLC, you still must file by the 15th day of the third month of the tax year. But, the tax year is considered to start on the day the business has shareholders or members, acquires assets, or begins doing business, whichever occurs first. From the IRS’s point of view, months start on the same numerical day at the date when the tax year started, and they end on the close of the preceding numerical day. So, if your corporation begins its first tax year on January 8, 2015, the 15th day of the third month is March 22, 2015.
- If your business uses a fiscal year, rather than a calendar year, you still have the same length of time to file: the 15th day of the third month of your company’s tax year. So, if your corporation’s fiscal year begins on July 1, you have until September 15, 2015 to make the election for your 2015 tax year.
Bear in mind that this election can have significant tax consequences, and it is important to understand all of them. If you are thinking about electing S corporation status, discuss all the ramifications with your tax professional.