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Late on Your Late S Corp Election? Fix It and Save Money!

By Eileen Corbett, JD, LLM | August 30, 2013

The IRS has just issued some welcome news for businesses that wanted to be taxed as an S corporation, but failed to make the required tax election(s) on time.

Under a new simplified method for requesting late election relief, many businesses have more time to submit a request. By using the simplified method, a business trying to fix election mishaps may avoid the IRS’s expensive letter ruling fees.

Entities must request relief within 3 years and 75 days after the date the election is intended to be effective. Corporations meeting certain requirements have even longer.

Tip

The S corporation election is not limited to businesses that are incorporated as corporations. For more information, see our article, “LLC Electing S Corp Status--The Best of Both Worlds.”

The election to be taxed as an S corporation generally has to be made by a specific date in the early part of the year (i.e., by the 15th day of the third month of the tax year). Not surprisingly, many intend to make the election but miss the deadline. The result? Missing the election deadline jeopardizes pass-through tax treatment and has to be corrected.

Act Now

Entities that have already requested a letter ruling regarding late elections, but qualify under the new procedure, have a short window of time to withdraw the ruling request and receive a refund of the user fee. Consult your advisor as soon as possible.

The new procedure is effective September 3, 2013, and is also available for late Qualified Subchapter S Subsidiary (QSub) elections, Electing Small Business Trust Elections (ESBT) elections and Qualified Subchapter S Trust (QSST) elections. The new IRS procedure consolidates a series of procedures that had been issued over the years into one simplified method for the various types of elections. After receiving the relief requests, the IRS will determine whether all requirements have been met.

Requesting Late Election Relief Under the New Simplified Method

Businesses asking the IRS for relief regarding a late S corporation election or QSub election must have reasonable cause for failing to make the election in the first place. Also, upon discovering their mistake, they have to had acted diligently to correct it.

Tip

A timely S corporation election is made using Form 2553, Election by a Small Business Corporation. A timely QSub election is made using Form 8869, Qualified Subchapter S Subsidiary Election. Requests for relief under the new procedure must include these forms and supporting documents as appropriate.

Similarly, election failures involving a QSST or ESBT had to be inadvertent and those seeking relief have to have acted diligently to correct the mistake upon discovering it.

Warning

Any election or request for relief has to satisfy detailed IRS requirements that depend on your situation and go beyond what is discussed here. Consult your advisor as early as possible about making any elections or requesting for relief.

If you can pass the reasonable-cause and diligence tests, plus the various other requirements, the new method could be very beneficial from a cost-savings perspective.

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