IRS Eases Rules for Late S Election

In the past we have had various Revenue Procedures (Rev Procs) dealing with making late S corporation elections.  These include Rev Procs 97-48, 2003-43, 2004-48, and 2007-62.  Now IRS has made Rev Procs 2003-43, 2004-48, and 2007-62 obsolete and modified Rev Proc 97-48.  Briefly this means Rev Proc 2013-30 is the Rev Proc that now applies (as of September 3, 2013).

In Rev Proc 2013-30 IRS has combined these revenue procedures into one place.  It addresses late S elections by corporations and noncorporate taxpayers, Electing Small Business Trusts, Qualified Subchapter S Trusts, and Qualified Subchapter S Subsidiaries.  In addition Rev Proc 2013-30 contains flow charts to help taxpayers determine whether they qualify for the late election procedures in this Rev Proc or if they have to apply for a letter ruling.

There are two reliefs available under this Rev Proc:  one with a 3 years and 75 day deadline, and one with no deadline.


In order to qualify for either relief the answer to each of the following questions has to be “YES”:

1. Did the requesting entity intend to be classified as an S corporation as of the Effective Date?  [Editor comment: This includes acting like an S corporation including items such as payroll for working shareholder/employees, proper reporting of health insurance premiums, etc.]
2. Does the entity fail to qualify as an S corporation as of the effective date solely because the election was not timely filed?
3. Does the entity have reasonable cause for its failure to timely file the election AND has it acted diligently to correct the mistake upon its discovery?
4. Can the S corporation provide statements from all shareholders that they have reported their income consistently with the S corporation election for the year the election should have been made and for all subsequent years?  This includes ALL shareholders who owned stock at any time during the period between the effective date and the date the completed election was filed.

3-YEAR DEADLINE

Briefly Rev Proc 2013-30 permits an eligible taxpayer to make a late S election as late as 3 years and 75 days after the effective date of the election.  This “3 years and 75 days” period is longer than the periods previously allowed under most of Rev Proc 1997-48, and all of 2003-43, 2004-48, and 2007-62.

Example #1 – a corporation intended to be an S corporation as of January 1, 2011.  The due date for making a late election is 3 years and 75 days from January 1, 2011, which makes March 15, 2014 as the deadline for making a late election for the year beginning January 1, 2011.

Example #2 – a corporation came into existence on August 4, 2010.  Three years and 75 days from this date comes to October 18, 2013, which is the deadline for making a late S election for this corporation effective August 4, 2010.

Example #3 – a noncorporate taxpayer intended to be an S corporation as of January 1, 2011.  The deadline for making a late election effective January 1, 2011, is now March 15, 2014.

NO DEADLINE

In the case of a corporation which wanted S status and which meets special conditions, there is not a deadline for making a late S election under this Rev Proc.  This is for corporations who meet the tests above and:

• The corporation and the shareholders have consistently filed their tax returns as if the S election was valid for every year the corporation intended to be an S,
• At least 6 months have elapsed since the date on which the corporation filed its first year return as an S, and
• Neither the corporation nor any of its shareholders were notified by IRS of any problem regarding the S status within 6 months of the date on which the Form 1120S for the first year was timely filed.

If these conditions are met, Rev Proc 2013-30 permits a late S election to be filed at any time, even after the “3 years and 75 day” provision applicable to other late elections.

If a taxpayer qualifies to apply for a late S election under this Rev Proc and currently has a letter ruling request pending with IRS, the taxpayer can withdraw the request and receive a refund of the user fees.  This withdrawal is available only if it is submitted to IRS by the earlier of October 18, 2013, or the date the ruling is issued.

You can find Revenue Procedure 2013-30 by going to www.irs.gov/pub/ and clicking on irs-drop, then clicking on rp-13-30.  We can also send you a pdf copy attached to an email upon request.


-This text has been shared with you courtesy of:  David & Mary Mellem, EAs & Ashwaubenon Tax Professionals, 920-496-1065 (920-496-9111).  davidmellem@yahoo.com, davidmellemea@yahoo.com, marymellem@yahoo.com, marymellemea@yahoo.com.