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Correcting Your Missed Sub-S Election (#3 in Sub-S Series)

You’re operating your business or LLC as an S-corporation, or so you think.  Then you learn you had to file a Form 2553 with the IRS to elect Sub-S tax status.  Did you know that Form 2553 allows you to go back up to 3 years and 75 days for the effective date of when you want the Sub-S status to begin?  You can obtain that relief by following what the IRS says on page 2 of the instructions for that form.

If you failed to make the Sub-S election and you thought you did, or you didn’t realize you should because you didn’t understand all the tax advantages of an S-corporation, you can hop into this limited “DeLorean” using this special “flux capacitor” form and go “back to the future” of your business to make the appropriate Sub-S election.  If you follow the simple but little-known IRS requirements, you should be able to treat all of 2020, probably 2019, and maybe even 2018, as if you were properly being operated and taxed as a Sub-S entity and have yet to file your returns.

To get the benefits of this back-in-time process, you must meet three requirements:

  • You intended to operate your business as a Sub-S entity as of the start date you elected.  A really good proof of that is if you drafted the documents for the entity (the LLC operating agreement or the corporate documents) showing it was your intention to be taxed as a Sub-S.  This means lots of special language.
  • Your business has met all the requirements of a Sub-S corporation since that date.
  • You have a reasonable explanation for why you failed to file your election form earlier.  Fortunately, the IRS has been lenient with regard to reasonable cause for filing late.  For example, the IRS has accepted tax payers’ rather lame excuses such as relying upon a tax advisor or attorney to file the Sub-S election and that person did not file it, or relying upon an employee to mail the form, and that employee never mailed it.  As long as you can advance a reasonable and honest position, there is potentially no risk in seeking to have this retroactive election made.

It is important to remember that if you are electing to be taxed as a Sub-S, you have to run your business as a Sub-S, and it has to have always been owned by individuals who could own a Sub-S corporation.

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