The Clock Is Ticking for Clients Who Want S Corporation Election Tax Savings in 2019
With tax filing season here and the federal tax code changes in place for over a year, you may have discussed the potential tax advantages of S Corporation election with some of your clients. For some, the pass-through tax treatment and 20 percent deduction on qualified business income might provide significant savings. If you have business clients who would benefit from being taxed as an S Corp in 2019, now is the time for action! The S Corp election filing deadline for existing LLCs and corporations is fast approaching.
A Quick Overview of the S Corporation
Even though you are likely familiar with what an S Corp is, I’d like to begin with a brief description.
An S Corporation is a corporation for which corporate income, losses, deductions, and credits flow through to its shareholders. To become an S Corp, a corporation must file Form 2553 (Election by a Small Business Corporation). The corporation itself doesn't pay taxes at the corporate rate on its profits. S Corporations avoid "double taxation"—i.e., when a corporation's profits are taxed at the corporate rate, and then some of those profits (those issued as shareholder distributions) are taxed again on shareholders’ personal tax returns.
Corporations that want S Corp taxation must meet certain eligibility criteria. Among the requirements are:
- Must be a domestic corporation (and not one that is ineligible such as certain financial institutions, insurance companies, and domestic international sales organizations)
- May not have more than 100 shareholders
- May not have shareholders that are non-resident aliens, partnerships, or corporations
- May only have one class of stock
LLC owners might find that choosing S Corp tax treatment will lower their self-employment tax burden. LLCs that meet the same above requirements regarding the number and type of owners can be taxed as an S Corp while remaining organized as an LLC. Keep in mind that LLCs must first submit form 8832 (Entity Classification Election) before filing Form 2553.
If an LLC wants to change to a corporation and the choose S Corp election, the process is more involved and comes with additional legal ramifications and compliance requirements.
Ultimately, I suggest that your clients talk with an attorney to make sure the entity type they choose serves them well from a legal perspective as well as from a tax standpoint.
When Is the Deadline to File for S Corporation Election in 2019?
For the S Corp election to be effective for 2019, existing LLCs and corporations (with a tax year that began on January 1) will need to file IRS Form 2553 no later than March 15, 2019.
If you have clients who want to wait to have S Corp election effective starting in 2020, they can submit Form 2553 any time during this year (2019).
Clients who start a new business this year, have two months and 15 days from their date of formation to file for S Corporation tax treatment for 2019.
You can find additional details in the Form 2553 instructions on the IRS website.
Learn More and Beat the Clock!
The bottom line: if you’ve run the math for clients and have found that S Corp election will lower their federal income tax obligations this year, time is running out to take advantage of that option. The March 15 deadline is around the corner!
How can you help move things along for them? Well, for starters, you can learn more about S Corp election in my upcoming free webinar for Latino Tax Pro, “Electing S-Corp Filing Status: What Your Clients Need to Know by March 15,” on Wednesday, March 6 at 11:00am PT. My colleague, Milton Turcios, will present the same webinar in Spanish on Thursday, March 7 at 11:00am PT. The webinar will cover:
- Attributes of S Corporations
- Filing deadlines and requirements for the S-Corp election
- Similarities and differences between S Corps, LLCs, and C Corporations
- Tax planning discussion points to address with clients.
I’ll also explain how partnering with an online business document filing service can help you earn additional revenue while you save your clients time and money when filing for S Corp election. Register today!
Nellie Akalp is a passionate entrepreneur, small business expert and mother of four. She is the CEO of CorpNet.com, a trusted resource for Business Incorporation, LLC Filings, and Corporate Compliance Services in all 50 states. Nellie and her team recently launched a partner program for accountants, bookkeepers, CPAs, and other professionals to help them streamline the business incorporation and compliance process for their clients. More info at CorpNet.com/partners.