The end of the year is not only a time for giving, but also a great time for tax planning. One tax planning opportunity for self-employed individuals with LLCs is deciding whether to make an S-corp election for their business next year.
In the right circumstances, this can save you thousands of dollars on taxes. However, S-corps are more complicated to maintain than LLCs, so it’s important to consider whether this is a smart move for you right now.
Gordon Law has consulted with many LLC owners in the decision-making process for electing S-corp status. Our team can help you make the best choice for your business.
What is an S-corp?
Unlike an LLC or C corporation, an S-corporation is a tax designation, not a legal entity. LLCs or corporations can elect S-corporation status for the tax advantages it offers to both.
- For a corporation, electing S-corp status allows the entity to pass the net income from the business to the shareholders, avoiding double-taxation.
- For an LLC, the net income is not subject to self-employment tax, but there is a requirement for shareholders to pay themselves a reasonable salary, which is subject to self-employment tax.
Who Should Make an S-corp Election?
Whether you should make an S-corporation election depends on your unique circumstances. There are logistical issues and administrative costs that may not make it feasible for some entities. LLCs should also consider the tax benefits already available, like the qualified business income (QBI) deduction, before switching.
A common time for a business to consider making the S-corp election is when they grow and typically earn over $100,000 in net income. However, the $100,000 threshold is only a general practice standard.
Regardless of your business size, it’s always a good idea to consult a tax professional before making the S-corp election.
When Does the S-corp Election Need to be Filed?
So you’ve decided to move forward and are wondering how and when to file for the S-corp election. Entities file Form 2553, Election by a Small BusinesS-corporation, with the IRS to make the election.
The S-corp election deadline is no later than 2 months and 15 days after the first day of the taxable year, or at any time during the year preceding the tax year the election will take effect.
Wait, what? It sounds confusing, but it’s actually quite simple. Most small businesses use the calendar year as the taxable year. If this is the case for you, then the S-corp election deadline is March 15.
For example, an LLC that has been in business for a few years wants to make the election for the 2025 tax year. For the tax benefits to take effect in 2025, the S-corp election deadline is March 15, 2025. The LLC could also make this election any time in 2024.
Some businesses use a fiscal year instead, which can start at any month of the year. If you’re not sure which taxable year you’re using, be sure to consult your tax professional.
Can You Backdate the S-corp Election?
In some cases, you can backdate an S-corp election if you missed the initial deadline. The requirements are:
- All business owners must agree to the election and your business must meet the S-corp requirements.
- The IRS typically requires a reasonable cause statement to get late election relief and avoid penalties.
- You must have treated your business as an S-corporation, including properly allocating income and losses to shareholders.
What To Do Before Filing the S-corp Election
Before filing the election, ensure that your business qualifies for S-corp status. There are requirements that entities must meet to elect or maintain their designation that may preclude some businesses from electing.
You’ll also want to make sure you have all the information you need to fill out Form 2553, including identifying information, the year you want the election to take effect, and your entity’s tax year.
How We Can Help
S-corporation status offers enticing tax savings that LLC owners should consider. Gordon Law has helped hundreds of business owners like you cover their tax and legal bases. Don’t pay the IRS any more than you have to—give us a call at (847) 580-1279 and see if you can uncover hidden tax savings!
