Your S-Corp Request and Acceptance Letter

An S-Corp has its advantages and disadvantages and these must be considered before you choose this tax status. It’s not automatic.

Before you choose to go down this path you should know that in order to qualify as an S-Corp you first must meet the following requirements:

  • Have no more than 100 shareholders
  • Individuals who are shareholders must generally be U.S. citizens or U.S. residents (trusts and estates may also qualify)
  • Be a domestic corporation
  • Have only one class of stock
  • Profits and losses must be distributed in proportion to the owners’ interest percentage
  • All owners of the S-Corp must give consent

If the business fails to meet any of the above requirements, the S-Corp is terminated automatically.

How to Become an S-Corp

If your business is an LLC or Corporation and wants to be treated as an S-Corp in the eyes of the IRS, Form 2553 must be submitted.

Form 2553, Election by a Small Business Corporation, should be filed within 2 months and 15 days of the year you would like the S-election to go into effect. However, there are remedies for a late request but the Form 2553 must be filed within 3 years and 75 days of the S-Corporation’s effective date.

If Form 2553 is filed the IRS will notify the business, typically within 60 days, whether or not the S-Corp request has been accepted or rejected.  If successful it is important that the S-Corp keep a copy of the acceptance letter. A third party may request it or the shareholder may need to prove the S-Corp status exists.

There have been cases where Form 2553 has been filed but no record of the S-Corp status is on file with the IRS. This may cause unnecessary delays in filing or processing of corporate or individual tax returns.

What Can I Do If I Cannot Find My S-Corp Acceptance Letter?

Sample CP261 Notice or S-Corp acceptance letter.

When you receive letters from the IRS about your business it is important to keep a copy of them. This is particularly true of your S-Corp acceptance letter or CP261 notice.

What are your options though if you can’t find the acceptance letter? Maybe you’ve misplaced it. Perhaps the dog ate it. Things happen. There’s no need to stress about it. You can call the IRS at (800) 829-4933 and request an S-Corp Verification. The S-Corp Verification or 385c letter is another way to get proof that the IRS acceptance of a previously filed Form 2553. Sometimes it is difficult to get through to someone but we have found a way to reach a live person at the IRS with less time on hold.

It is a good idea to send Form 2553 by certified mail with return receipt so that you have proof that it was sent. Keeping a record of what you both send to the IRS and what you receive from may help to correct issues quicker.

What Should I Do After Receiving the S-Corp Acceptance Letter?

If you submitted Form 2553 and received your acceptance letter, congratulations, your business will now be taxed as an S-Corp for federal tax purposes. The shareholders or owners of the S-Corp will get a Schedule K-1 to show the business profit or loss for the year. The owners will then include the information from the Schedule K-1 on their personal tax returns. This is true even if you are the only owner of the S-Corp.

In addition, the S-Corp must prepare to pay reasonable salaries to its active owners. To put it simply the owners become employees of the S-Corp. They business must obtain an employer identification number (EIN), pay the owners through payroll and distribute a W-2 for their salary just as it would any hired employee.

When Should We File Our Tax Returns

It doesn’t stop there. The S-Corp must file a separate tax return, Form 1120-S, which has a due date of March 15. Be sure to file the S-Corp tax return by the due date. Filing Form 1120-S late could lead to costly penalties. At the time of this writing, there is a late filing penalty of $220 per month AND per shareholder even if no tax is due.

Your individual tax return is still due by April 15 and should include the gains or losses from your ownership share of the S-Corporation.

Still need help? Contact us to speak with a tax advisor.