Electing S Corp Status

With a new tax year starting in just a few weeks, now is the time to consider filing elections that will take effect for 2016 and beyond. One such measure with an early deadline is the election to be treated as a Sub-chapter S Corporation.

The S Corp election may offer significant tax advantages over the traditional corporate (so-called “C Corp”) tax structure, especially for small companies with owners that work in the business. S Corporations retain the pass through tax structure enjoyed by sole proprietorships and partnerships, but with the advantage that some business income may not be subject to self-employment tax. An LLC that elects to be treated as an S Corp may also enjoy abbreviated record keeping and filing requirements at the state level.

If you are considering converting your business to an S Corporation, you should be aware that the election carries certain tax consequences and other obligations which must be carefully managed in order to successfully transition. For example, S Corporation employee shareholders must be paid a salary and have adequate income reported to the IRS on Form W2 (this is not a requirement for sole proprietorships or partnerships). Additionally, S Corporations must meet certain compliance requirements to avoid losing the benefit of the election. These include (but are not limited to) the following:

• Not more than 100 shareholders
• Not more than one class of stock
• Limitations on who can hold S Corp stock

S Corps that were previously treated as regular corporations or with built-in gains property at the time of the conversion have certain tax related record-keeping obligations that complicate the election.

The election to be treated as a sub-chapter S Corporation, which is filed using IRS Form 2553, has a filing deadline of no later than two months and fifteen days into the tax year, or March 15th, 2016 for companies with a calendar tax year. Relief is available for late filers, provided certain criteria are met. If you reside in a Community Property state, then you may face special requirements in order to successfully claim the election.

If you would like to discuss how the election might help you lower your tax bill, please contact us.