Electing S Corporation Status

A timely and proper S corporation election generally permits the income of the business to be taxed directly to the shareholders of the corporation rather than to the corporation itself. In order to be effective in a current calendar year, the election must be filed by March 15th of that year. If it is filed any later, the election will apply to the next tax year.

A proper S corporation election must be made on the appropriate form (Form 2553). The Tax Court has concluded that the form itself is a required part of the election process and that the filing of an S corporation tax return is not sufficient to show substantial compliance with the election process. The filing of Form 2553 indicates that the corporation has made the S status election and that the shareholders bind themselves to the election. In order to be an effective election, the form must be signed by an officer of the corporation who has the authority to sign the corporation's returns.

Shareholder Consent Required

The election of S corporation status must show the consent of each and every shareholder. This consent may appear either on Form 2553 or on a separate statement filed with the form. If shares are held in any form of joint ownership, then each joint owner must give written consent. If the shares are held by a minor, the consent of the minor must be made by the minor, if legally competent, or by either a legal representative or a parent.

The Internal Revenue Service permits a corporation seeking S status to obtain a six-month extension to file the required consents when there is reasonable cause for the failure to file in a timely manner and certain other conditions are met. In addition, the IRS has the authority to waive the effect of an invalid election caused by a corporation's inadvertent failure to qualify or to obtain the required shareholder requests. If a corporation has a reasonable cause justifying a late filing of an S corporation election, the IRS may treat the late-filed election as timely.