When to Make the S-Corp Election

You’ve figured out the “What?” and the “Why?” with What is an S-Corporation, you’ve checked to make sure your small business is eligible with Who Can Make the S-Corp Election, and you’ve even got the basics covered on How to Make the S-Corp Election. Who, what, why, how – all we’re missing is the “When?”, so let’s get to it! Like all things good, all things involving the IRS take a little planning. The timing of when to file your S-Corp election and start saving on your small business taxes can be a little tricky depending on the particulars of your small business, but read on to figure out all the details and the optimal filing time for your small business. Or take the guesswork out of it and let our CPA firm that specializes in s-corp accounting do it for you!

Existing Small Businesses

Let’s assume you’ve decided to make the S-Corp election and start saving money on taxes for your small business. The timing of when to file is not quite as tricky as it is for a new business (which we cover below), but it is still important to be aware of. Basically, you have three options to choose from.

Option 1: Prospective for the next year

An existing business that wants to elect S-Corp status for the coming year can file the IRS form to make the S-Corp election at any time during the year before the first tax year that they want the S-Corp election to go into effect. In this case, the small business will have S-Corp status go into effect on the first day of the new tax year after the last tax year in which the S-Corp election was made.

Example: A small business decides in 2021 to elect S-Corp status for the coming tax year that begins on January 1, 2022. They can file the IRS form any time during 2021 and their S-Corp status will go into effect on January 1, 2022.

Option 2: Current for this year

If a small business decides to make the S-Corp election, and they want it to be effective for the current tax year, they must file the IRS form electing S-Corp status within 2.5 months of the beginning of the current tax year. Assuming a standard tax year, this means March 15th is the deadline to elect S-Corp status and have it applied immediately to the current year.

Example: A small business decides in February of 2022 that they would like to make the S-Corp election for the current year and foreseeable future years. They must file the IRS form by March 15, 2022.

Brand New Small Businesses and Startups

If your small business is brand new and you wish to make the S-Corp election right off the bat for the first tax year, then the IRS Form must be filed within 2 months and 15 days after the beginning of your small business’s first tax year in order for the S-Corp election to be effective for the first tax year. If the IRS form is filed after this deadline then the S-Corp election will not take effect until the following tax year.

How does a small business owner know the first tax year start date?

The beginning date of your newly formed small business’s first tax year will be the earliest date that the corporation has shareholders, acquires assets, or begins conducting business. As mentioned previously and in Who Can Make the S-Corp Election?, the S-Corp election can only be made after a small business is legally incorporated with their state. Often, the earliest date for the corporation’s first tax year will be automatically triggered when the small business begins the legal incorporation process, assuming the small business is deemed to have shareholders (even if the shares of stock have not actually been issued yet).

In a case where a small business files their articles of incorporation before they have shareholders, acquire assets, or conduct business, the start date for their first tax year won’t be triggered. Even though the small business is incorporated, the tax year start date won’t begin until one of the above things happens at a later date. The earliest of these ‘later dates’ will trigger the time period. Filing the IRS Form before the “first tax year” is triggered or before the small business is legally incorporated will invalidate the S-Corp election, and our CPA firm wants to make sure that doesn’t happen! Our accounting services for small businesses want you to start saving money on your small business taxes with the S-Corp election as soon as possible, so give us a call if this all seems a bit heady.

Still interested? Let’s take a closer look at some possible scenarios.

Most Common Scenario: Tax year triggered by incorporation

A small roofing business bought some shingles in January 2021 for their first roofing job, which means they started “conducting business” in January 2021 as far as the IRS is concerned. They also may have acquired assets or shareholders. On February 23rd they filed their articles of incorporation with the secretary of state. This triggered their first tax year start date and therefore the 2.5 month filing window for the S-Corp election began on February 23, 2021 and they would have had to file the IRS form for S-Corp election by May 7, 2021.

Filing their articles of incorporation triggered the start day of the small business’s first tax year because they had already satisfied at least one of the three ‘tests’ (acquiring assets or shareholders, or conducting business) at some point before they registered their business with the state. In turn, the 2.5 month window began on the date of incorporation.

Less Common Scenario: Tax year triggered after incorporation

A seamstress decided to open her own home tailor shop, and she filed articles of incorporation on April 25, 2021. She opened the doors for customers and began doing business on May 22, 2021, and she had acquired shareholders on May 9, 2021. In order to be taxed as an S-Corporation for her first tax year, she would have needed to file the IRS Form by July 23, 2021.

This is because despite being incorporated earlier, the first triggering event (acquiring shareholders) did not take place until May 9, 2021. Therefore, that is the date that the 2.5 month filing window began. Even though she did not start doing business until May 22, 2021, acquiring shareholders triggered the start date.

What Not to Do: Invalid election before incorporation

A new restaurant owner purchased and renovated a taco truck and he began serving customers on February 1, 2022. He knew he wanted to make the S-Corp election, so he filed the IRS form immediately on February 2nd, but he didn’t file articles of incorporation to register the business with the State until February 10th. The S-Corp election will be invalid.

It’s invalid, because even though he had satisfied at least one of the three tests to trigger the tax year start date, the small business had not legally come into existence yet since the articles of incorporation hadn’t been filed. Because he had not registered the small business yet, the business wasn’t eligible to file an S-Corp election at the time he did. Head over to Who Can Make the S-Corp Election? to get the low-down on S-Corp eligibility.

Also Don’t Do This: Invalid election before the first tax year begin

A landscaper wanted to go into business himself and start a lawn care company. He decided an S-Corp is the way to go, and he’s excited to get all the legal stuff out of the way and get started on his business. So he filed articles of incorporation on June 2, 2021. The next day he filed the IRS form to make the S-Corp election. He thinks his ducks are in a row and he’s ready to start the business. On June 11th he acquired shareholders, and one week later he acquired assets and began landscaping services. In this scenario, the S-Corp election will be invalid.

Even though he filed his articles of incorporation before the S-Corp election, the tax year beginning date wasn’t triggered until he satisfied one of the three tests, which didn’t happen until June 11th when he acquired shareholders.

Other Nitty Gritty Scenarios

Maybe your small business has a special situation. With all the IRS rules, there seems to be a never-ending list of exceptions and special circumstances, and S-Corp elections are no different. There is late filing relief, short tax years for new businesses, and ways to fix invalid elections. If you think you need to explore these other circumstances, it’s probably best to give us a call and let a CPA who specializes in s-corporation tax go over your small business’ particulars.