S-Corp Election
Understanding the Process of Electing S-Corp Status for Your Corporation
The S-Corp election refers to the process by which a qualifying corporation elects to be treated as an S corporation for federal tax purposes. This election offers pass-through taxation benefits, allowing profits and losses to be reported on the individual tax returns of shareholders, while also limiting corporate liability.
How To File S-Corporation Election
Opting for S-corporation status involves submitting the ‘Election by a Small Business Corporation’ form to the IRS Service Center alongside the corporate federal income tax return. Unanimous shareholder approval is essential, with all shareholders required to sign the form.
Furthermore, three states (New York, New Jersey, and Arkansas) mandate S-corporations to file a state election application following IRS approval of the federal election.
Eligibility for S-Corporation Status
To elect S corporation status, a corporation must meet the following requirements:
- Must be a domestic corporation organized under the laws of any state or U.S. territory.
- Maintain only one class of stock.
- Maintain a maximum of 100 shareholders.
- Shareholders may only be individuals, estates, or certain qualified trusts.
- All shareholders must either be U.S. citizens or legal residents.
When Should the Election Be Filed?
To ensure the election’s effectiveness at the start of the tax year, it must be filed by the 15th day of the third month of the corporation’s tax year. For instance, a corporation operating on a calendar tax year must file by March 15th for the election to take effect for that tax year.
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Termination of S Corporation Status
S corporation status can be terminated either voluntarily or involuntarily:
Voluntarily:
- S-Corporation election may be voluntarily revoked with the consent of shareholders holding more than 50 percent of the outstanding shares of stock (voting and nonvoting) on the day the revocation is made.
Involuntarily:
- S-Corporation status is involuntarily terminated if any disqualifying events occur. These events include having more than 100 shareholders, a shareholder who is not an individual, estate, or trust, or a shareholder who is a non-resident alien.
- Generally, the election is automatically terminated as of the date the disqualifying event occurs. However, if a corporation has both accumulated earnings and profits as well as passive investment income exceeding 25 percent of the corporation’s gross receipts for three consecutive years, the corporation’s election will be terminated beginning with the following tax year.
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Our company offers professional business filing services that ensure your company documents and applications are accurately filed and in compliance.
Re-election of S Corporation Status
A corporation may re-elect S corporation status only on the 5th year after the year in which the termination or revocation became effective.
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