Tax Planning for Small Business Owners Your S corp election letter and your tax plan
The IRS letter that accepted your S corp election shows the date your company started being taxed as an S corp. That date shapes this year's plan.
What the letter is
When a company files Form 2553, the IRS replies with a notice that accepts the election, usually Notice CP261. It shows the company's name, its employer identification number, and the date the election took effect. Keep it with your formation papers.
An LLC or a corporation isn't an S corp until that election is filed and accepted. Without it, a one-owner LLC is taxed as a sole proprietorship and a multi-owner LLC as a partnership.
Why the effective date matters for planning
From the effective date on, an owner who works in the business needs a salary through payroll, the company files Form 1120-S, and a Solo 401(k) is figured from your W-2 salary. Before that date, the business was taxed the old way. If an election took effect partway through a year, the plan for that year has two parts.
How to find it if you've lost it
Start with last year's business return. A Form 1120-S means the company was filed as an S corp. You can then ask the IRS for a copy of the acceptance, or ask us to help request it. If no election was ever accepted, we look at whether late-election relief fits your case.
If the names don't match
Check that the company name and employer identification number on the letter match your bank account and your last return. A mismatch often explains a confusing year, such as a bank account opened under a different company. We help you line the records up so the return and the books describe the same company.
If you haven't elected yet
Form 2553 is due no more than 2 months and 15 days into the year the election takes effect, which is March 15 for a calendar-year company. Late-election relief under Revenue Procedure 2013-30 is available within 3 years and 75 days, with reasonable cause. Our page on choosing how your business is taxed covers when the election fits.
Questions about the election letter
Do I need the letter for the call? No. It helps, but last year's return tells us most of what we need.
Can I undo an S corp election? Yes, by revoking it. The company generally can't elect again for five years, so we plan that step carefully.
Want us to check your election?
Tell us how the company files today, and the effective date if you know it.
You will be talking to the Steven Palmieri practice.