You formed the LLC in March, meant to elect S-Corp status, and found out in October that the deadline was in May. Or your CPA ran the numbers in January and the election that would have saved you $9,000 last year was never filed. Both are fixable, and the fix is the same Form 2553 with a few extra lines, filed under a relief procedure the IRS grants almost routinely when the conditions are met. What is not fixable after the fact is the payroll, and that is where a late election actually gets complicated.
This is a short, practical guide to the late S-Corp election: the real deadline, the relief procedure and its conditions, how to fill in the form, what to do about salary for a year that is already partly over, the state elections that do not follow automatically, and when a late election is not worth making.
Form 2553 is due no later than two months and 15 days after the beginning of the tax year the election is to take effect. For an existing business on a calendar year, that is March 15 for an election effective January 1. For a new LLC, the first tax year begins on the earliest of the date it had shareholders (members), acquired assets, or began doing business, so an LLC formed on March 10 that opened its bank account the same week has until about May 25 to elect S-Corp status effective from formation. An election filed after the deadline is effective the following year, unless relief is granted.
An LLC does not need a separate Form 8832 to be taxed as a corporation first. A timely Form 2553, or a late one accepted under the relief procedure, is treated as both elections: the LLC becomes a corporation for tax purposes and an S-Corp on the same day.
The IRS grants relief for a late election without a private letter ruling when four things are true. The entity intended to be an S-Corp as of the requested effective date and only failed to file on time. The request is made within three years and 75 days of that effective date. The entity has either not yet filed a return for the first year, or every return it and its shareholders filed was consistent with S-Corp status (an 1120-S, not an 1120 or a Schedule C). And every person who was a shareholder at any time since the effective date signs a consent and confirms they reported their income consistently. The form also needs a reasonable cause statement: a sentence or two explaining why the election was late (the owner did not know the deadline, the accountant did not file it, the form was mailed and never received) and that the entity acted diligently once the failure was discovered.
| Where | What to do |
|---|---|
| Top of page 1 | Write "FILED PURSUANT TO REV. PROC. 2013-30" |
| Part I, item E | The effective date you want, which is the start of the tax year (for a new LLC, the formation or start date) |
| Part I, item I | The reasonable cause statement and the diligence statement (attach a page if the box is too small) |
| Part I, column K | Every shareholder since the effective date signs; each also states that they reported income consistently with S-Corp status |
| Where to send it | Either attach it to the first Form 1120-S (if filing within the window and the return is not late), or file it separately with the IRS service center for your state, by mail or fax |
If the first 1120-S is due before the IRS acts on the election, file the return on time with the form attached and write the same notation on the return. Expect an acceptance letter (CP261) within a few months; keep it permanently, because lenders, buyers and future CPAs will ask for it.
An S-Corp owner who works in the business must be paid reasonable compensation through payroll, with withholding and payroll tax returns. A late election effective January 1 makes the owner an employee from January 1, and the money the owner took out during the year as "draws" has to be reclassified. If the election is made before year end, the fix is to run payroll before December 31 for a salary that is reasonable for the year, treating enough of the year's draws as wages, filing the quarterly Form 941s (late ones with penalties for the quarters already past, or a single fourth-quarter catch-up if the payroll provider and the CPA agree the wages were paid in the fourth quarter), and issuing a W-2 in January. If the election is made after year end for the prior year, there was no payroll in that year and none can be created retroactively; the owner reports the draws as distributions, the 1120-S shows zero officer compensation, and the return is exactly the profile the IRS looks for when it reclassifies distributions as wages. Late elections for a year that is already closed are best reserved for years with little or no distributions, or accepted with the risk understood.
Once the election is in, the books have to change too: the owner's equity account splits into salary (an expense) and distributions (equity), the accountable plan replaces personal payments for business expenses, and shareholder basis starts being tracked from the effective date. Our guides to S-Corp bookkeeping requirements and salary vs distribution cover what the first year looks like.
Most states follow the federal election automatically. A few do not: New York requires its own election (Form CT-6) for the corporation to be an S-Corp for state tax, and several states impose entity-level taxes or franchise taxes on S-Corps regardless of the federal status (California's 1.5% tax on S-Corp income and its $800 minimum, for example). If the federal election is late, check whether the state has its own deadline and its own relief; missing the state election can leave the company a C-Corp for state purposes while it is an S-Corp federally, which is a mess worth a phone call to avoid.
The S-Corp election saves payroll tax on the portion of profit taken as distributions rather than salary, less the cost of running payroll and a separate return. Below about $60,000 to $80,000 of profit per owner the saving rarely covers the cost. For an LLC formed this year that will show a small first-year profit, electing effective January 1 of next year, on time, is simpler and loses almost nothing. The late election is worth the paperwork when the year in question had real profit, distributions were modest or payroll can still be run before year end, and the owner is going to run the company as an S-Corp from here on.
HaraPro tracks the S-Corp from its effective date: salary and distributions labelled separately, the accountable plan reimbursements, shareholder basis, and a tax forecast that shows the payroll tax saving against the cost of running the entity, so the decision to elect (or to wait a year) is made on the numbers; the S-Corp bookkeeping page shows the setup, and one business is free forever.
Usually yes. Under Rev. Proc. 2013-30 the IRS accepts a late Form 2553 without a ruling if you file within three years and 75 days of the intended effective date, intended to be an S-Corp from that date, filed consistently (or have not filed yet), and every shareholder consents and states a reasonable cause.
Two months and 15 days after the LLC's first tax year begins, which is the earliest of the date it had members, acquired assets or began business. An LLC that started in March has until about late May to elect effective from formation.
No. A Form 2553 that is timely or accepted under the late relief procedure is treated as both the election to be taxed as a corporation and the S election.
Run payroll before December 31 for reasonable compensation for the year, reclassifying enough draws as wages, and file the payroll returns. If the election is for a year that has already ended, no payroll can be created for that year, and the return will show distributions with no salary, which carries reclassification risk.
Most states follow the federal election. Some, including New York, require their own election with their own deadline, and some tax S-Corps at the entity level regardless. Check your state when filing late.