When starting a new business, we never recommend doing an S corp election right away. It’s unnecessary and may lead to more harm than good. The reason is, you can retroactively change the effective date to the beginning of the tax year. The strategy to backdate an S corp election allows you to see how your new business is progressing and then decide later if an S corp makes sense for your business. If you immediately elect to be taxed as an S corp your business could incur unnecessary costs and compliance requirements if it turns out you shouldn’t have been an S corp in the first place. 

The IRS timely filing guidance states you must file the Form 2553, S corp election, no later than two months and 15 days after the beginning of the tax year the election is to take effect. This means you need to file the paperwork by March 15th (for businesses that began in a previous year) or two and a half months from the date of incorporation for new businesses. With that being said, you are easily able to request late election relief from the IRS that extends this deadline.

Late Election Relief

Late election relief is allowed under IRS Revenue Procedure 2013-30 and states that as long as you have met the following criteria, you are able to backdate an S corp election:

1. The business intended and has operated as an S corp since the effective date entered on Form 2553.
2. The corporation has reasonable cause for the failure to file timely. This could be as simple as saying “we didn’t know it needed to be filed”.
3. The only reason the business is not an S corp is because the election was not filed timely. Basically, the business is eligible to be an S corp and meets all S corp criteria.
4. The election is made within 3 years and 75 days of the effective date. There is on big caveat to this. All required S corporation tax returns and compliance requirements (such as payroll processing) have been filed during the retroactive period. For this reason, we don’t recommend filing an S corp election after November in the first year the business is intending to be taxed as an S corp (so all compliance requirements are met).

How to Backdate an S Corp Election

1. Complete Form 2553. Instructions can be found at the following link – Click Here. Any additional steps are outlined in steps 2-4 below.
2. Ensure the top of Form 2553 states “Filed Pursuant to Rev. Proc. 2013-30”. If this isn’t specifically stated, the IRS will reject the request.
3. The effective date on Line E is the backdate you would like the S corp to be effective. In most cases, this will be January 1 of the year you would first like to be taxed as an S corp (or the incorporation date for new businesses).
4. On Line I, you request late election relief. You can find a template for example wording at the following link – Click Here.
5. Once complete, sign, date, and file Form 2553 with the IRS. 

Now that you’ve backdated the S corp election you can reap the tax benefits for the full year!