It’s likely that if you own a small business, you have heard about the advantages of choosing to pay taxes as a S corporation. Pass-through taxation is a feature of S corporations, which implies the company does not pay taxes on its own profits. Instead, the shareholders receive a pass-through of the profits, which they then declare on their own tax returns. For small enterprises, this can translate into significant tax savings. What happens, though, if you began the year as a conventional corporation or LLC? Can you still run for office in the middle of the year? Yes, you can hold a S election in the middle of the year. There are several crucial considerations, though. To begin with, not every firm is qualified to submit a S election. Your company must meet specific requirements, such as having no more than 100 shareholders and just one class of shares, in order to be eligible. In order to make a S election, you must submit IRS Form 2553 if your company satisfies these requirements.
The potential tax repercussions should be taken into account before making a S election mid-year. You must submit Form 1120S for the time you were a S corporation if you are changing from a regular corporation to a S corporation. As a result, you must prepare two tax returns for the year, one for the time you were a S corporation and one for the time you were a regular corporation.
The procedure is slightly less complicated if you are changing from an LLC to a S corporation. You won’t need to submit a separate tax return for the time you were an LLC, but you will still need to file Form 1120S for the portion of the year in which you were a S corporation. Instead, you must fill out Form 1120S to disclose your earnings and outgoings for both months.
How can you determine if your LLC is a S corporation, then? Your LLC is now a S corporation if you have already submitted Form 2553 and the IRS has accepted it. Call the IRS Business and Specialty Tax Line at 1-800-829-4933 to check the status of your S election if you’re unsure if you’ve been approved.
Last but not least, it is important to note that sole proprietors cannot submit Form 2553 to convert to a S corporation. They must instead first create a corporation or LLC before making the S election.
To sum up, it is conceivable to make a S election in the middle of the year, but it is crucial to carefully evaluate the potential tax repercussions and eligibility requirements. It could be a good idea to speak with a tax expert if you are unsure whether making a S election is the best option for your company.