What To Do If Your Business Missed The S Corp Tax Deadline

By Nellie Akalp

The deadline for existing limited liability organizations and C Organizations to elect S Corporation tax procedure for the tax 12 months 2022 was March 15. So, what occurs if a organization skipped the S Corp deadline? Can it nonetheless change its LLC or C Corp tax remedy from its default position to that of an S Corporation?

These are critical queries for organization entrepreneurs who are striving to enhance their tax outcomes and maximize their profitability.

S Corporation overview and eligibility needs

What is an S Corp?

Right before we dig into the deadline situation, let’s to start with examine what it signifies to be an S Corporation. An S Company is not an totally unique sort of business entity. Somewhat, it is a exclusive pass-as a result of tax election that an LLC or C Corporation requests by way of the IRS.

Move-by tax standing suggests that an S Corporation’s small business profits, losses, deductions, and credits move by way of to its house owners. While an LLC is by default a move-by entity, move-by taxation as an S Corp is managed a small differently—more on that later. An LLC or company need to file Form 2553 (election by a smaller business enterprise corporation) to ask for S Corporation tax procedure.

S Corp eligibility needs

A organization have to meet up with the IRS’s requirements to qualify to be taxed as S Company:

  • Must be a domestic company (or LLC).
  • May possibly not have extra than 100 shareholders (or LLC customers).
  • May perhaps not have owners that are non-resident aliens, partnerships, or firms. All shareholders in an S Corporation should be individuals (not LLCs or partnerships) and lawful residents of the United States.
  • An S Corp may well have only 1 course of inventory. Entrepreneurs have to share equally in phrases of income and losses centered on their share of ownership.
  • Companies that are not suitable to be handled as S Corps incorporate certain financial establishments, insurance organizations, and domestic intercontinental profits corporations.

C Corporation electing S Corporation position: Tax cure overview

Normally, a C Corporation data files a corporate money tax return and pays earnings tax on its earnings at the company tax level. Some of its earnings are subject to “double taxation” i.e., some of a corporation’s gains get taxed when the C Corp earns that money and when the company distributes those profits as dividends (which are not tax-deductible) to its shareholders.

Just after the corporation pays revenue tax on these monies at the company tax prices, shareholders also report and pay tax on the earnings on their own tax returns at their particular person tax costs.

Alternatively, a company that has elected to be dealt with as an S Corporation is thought of a move-by means of entity. Hence, its revenue and losses flow via to its shareholders’ personal tax returns (according to their shares of possession). The shareholders pay out tax on that earnings at the applicable particular person tax charges, but the small business does not spend income tax on the income. Consequently, S Corp taxation eradicates the “double taxation” that applies to organizations under their default tax cure.

Shareholders who are staff of the C Company pay Medicare and Social Security taxes (FICA taxes) only on the wages and salaries the firm pays them. Dividend income they obtain is not topic to Social Protection and Medicare taxes.

Whilst a C Corp electing S Corp position follows a diverse profits tax protocol, its company compliance obligations for the underlying company entity type (C Company) continue to be the exact. For case in point, the corporation have to adopt bylaws, designate a registered agent, appoint a board of directors, maintain shareholder conferences, etcetera.

S Company positive aspects for C Companies

Avoiding double taxation stands as the primary explanation business people with C Organizations elect S Company status. Commonly, the tax filing system as a move-by way of tax entity is less complex, far too.

S Corporation negatives for a C Corporation

S Corp election may possibly not be best for each individual C Company mainly because it offers fewer versatility in selected respects:

  • S Corp election places limits on who is eligible to own the company.
  • Business enterprise cash flow or loss is allocated in immediate proportion to every shareholder’s possession proportion of the corporation. For instance, suppose shareholder 1 owns 60% of the company and shareholder 2 owns 40%. Shareholder 1 will be taxed on 60% of the gains and shareholder 2 will be taxed on 40% of the gains, irrespective of other agreements created about dividing revenue.
  • Since an S Corp could only have 100 or much less shareholders, the corporation’s means to raise funds and fund development may be minimal.

These are some of the prospective downsides for small business homeowners to look at.

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LLC electing S Company status: Tax cure overview

An LLC is a move-via tax entity, with its gains flowing as a result of to its members’ personalized tax returns. LLC customers need to spend revenue tax and self-employment taxes (Social Stability and Medicare) on all the company’s gains.

With S Corporation election, LLC users only pay out Social Safety and Medicare taxes on money paid to them as wages and salaries. The profits the firm provides them as distributions are not matter to Social Security and Medicare taxes.

An LLC faces the similar LLC company compliance formalities regardless of irrespective of whether it opts for default or S Corp tax cure. For illustration, it must manage a registered agent in the point out, use for necessary licenses and permits, and get an EIN. Nonetheless, getting an S Corporation for tax functions does not load an LLC with C Corp compliance requirements like adopting bylaws or appointing a board of administrators.

S Corporation strengths for LLCs

LLC associates may well be drawn to S Corp election because it could enable them decrease their individual tax burden. Cash flow compensated to enterprise proprietors through payroll is subject to Social Protection and Medicare taxes (FICA), while income distributions are issue to income tax but not FICA taxes.

S Corporation down sides for LLCs

On the flip aspect, some possible negatives exist:

  • The IRS restricts who might individual an LLC.
  • LLC users who work in the small business need to compensate by themselves with a practical wage or wage. If they test to get away with spending as minimal FICA tax as doable by having to pay on their own an unreasonably very low wage and taking a disproportionate volume of funds in distributions, it could elevate purple flags with the IRS.
  • Managing payroll for LLC members adds added perform and administrative concerns for LLCs that normally would not have staff.
  • Submitting taxes as an S Corp is additional advanced than submitting as an LLC.

What about the 2022 S Corp election deadline?

To be considered an S Company for tax applications in all of 2022, existing LLCs and C Companies that adhere to a January 1–December 31 tax yr experienced to submit an IRS Sort 2553 by March 15, 2022 (two months and 15 days right after the commence of the 2022 tax calendar year).

If they missed that deadline, they can however file Form 2553, but the election will only be powerful for the remainder of the calendar year. That implies, they will have two sets of cash flow tax documents to offer with.

So, say an current LLC missed the deadline and submitted its Variety 2553 on May perhaps 1, 2022.

  • For January 1–April 30, 2022, it will have to file taxes as an LLC.
  • For May well 1–December 31, 2022, it will have to file taxes as an S Corp.

Businesses that abide by a fiscal yr other than the calendar yr have right until two months and 15 days (75 times) immediately after the start out of their fiscal calendar year to file for S Corp election.

New LLCs and C Companies registered in 2022 have two months and 15 days (75 times) from their development day to file for S Corp tax procedure for their initially tax yr.

Enterprises have overall flexibility if they want their S Corp tax cure to consider outcome setting up with their 2023 tax year. They can file their Type 2553 whenever for the duration of tax yr 2022 to make it powerful for 2023.

Leeway for corporations that pass up their deadline

If an LLC or corporation demonstrates it has acceptable result in for not submitting Sort 2553 on time, the IRS might approve the S Corp election retroactively to the starting of the company’s tax yr. Company homeowners will have to incorporate an explanation on Kind 2553 of why they are publishing their submitting late.

Must your small business elect S Corporation position?

In advance of relocating forward with filing for S Corp election, it is valuable to communicate with a tax advisor or accountant and attorney to establish if the transform will make perception for your circumstance. There are execs and disadvantages, so it’s crucial to fully grasp all the methods S Company standing will impression your organization.

About the Writer

Nellie Akalp is Founder and CEO of CorpNet.com, a dependable resource and company supplier for enterprise incorporation, LLC filings, and company compliance expert services in all 50 states. See Nellie’s content articles and comprehensive bio at AllBusiness.com.

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