Deadline to Elect S Corporation Status for 2014 Is Fast Approaching

Although much of the country seems mired in winter, there is one sure sign that spring is here. No, it’s not more daylight or spring training. It’s the return of the annual American ritual of “tax season.” Along with your income tax deadlines, there is another filing deadline that small business owners may wish to consider: electing S Corporation status.

Prior to the advent of the limited liability company, the S Corporation was the entity of choice for those starting a business. Despite the current popularity of the LLC, many businesses still find that the S Corporation provides tax advantages over both a C Corporation and an LLC's default tax classification.

Chief among these advantages is the ability to structure owner compensation into both salary and dividends—thereby reducing self-employment tax liability. While S Corporation dividends are entitled to a special tax rate and the shareholders are taxed on retained earnings as though that income had been distributed, the self-employment savings can be considerable. The fact that S corp income is "passed through" to the owner and taxed at the owner's tax rate, without a corporate level tax, has traditionally been considered an advantage, but higher individual tax rates and new taxes on investment income have eroded this advantage in some cases.

In fact, the way the entity is taxed is the only distinction between a C Corporation and an S Corporation. From the perspective of state law, a corporation is a corporation. This means that an S Corporation is created by first filing articles of incorporation in the formation state. (There are some limitations the tax law imposes on corporations that want to be S Corporations: there can be only one class of stock, certain types of shareholders are prohibited, and the number of shareholders is limited.) Because an S corporation is simply a corporation for state law purposes, all the normal state requirements apply. You will need to appoint a registered agent, adopt bylaws and hold meetings as required by the state of incorporation. CT's latest White Paper, “Choice of Business Form: The S Corporation” provides an excellent primer for state law considerations when forming an S Corporation.

Once your corporation has been formed, you elect S corp status by filing IRS Form 2553, Election by a Small Business Corporation. When you file this form determines when the election becomes effective. There is a very short window of opportunity 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.)

Here’s a recap of the filing deadlines for a 2014 tax year election. Bear in mind that converting from an existing C Corporation to an S Corporation can have tax consequences. If you are thinking about electing S Corporation status, discuss all the ramifications with your tax professional.

• March 17, 2014 is the deadline for calendar-year corporations that have been in existence the entire year. (Normally, the due date is March 15, but when that day falls on a Saturday, Sunday or holiday, then the due date is the next business day.
• If your corporation uses a fiscal year, Form 2553 must be properly filed by the 15th day of the third month of its tax year (or the next business day if the Saturday, Sunday, holiday rule applies). For example, if your corporate fiscal year begins on July 1, then you must file an S corporation election for your 2014 tax year by September 15, 2014.

Brand-new corporations have a slightly different deadline because you can’t make an S corporation election before the start of the first tax year—and most corporations do not start their first tax year on January 1. You get the same amount of time to make the election. The filing deadline is still the 15th day of the third month of the tax year. But, the tax year is considered to start on the day the corporation has shareholders, acquires assets, or begins doing business, whichever occurs first. From the IRS’s point of view, months start on the same numerical day as 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 7, 2014, the 15th day of the third month is March 21, 2014.