Compliance & tax
S corporation election
Federal tax election under IRC § 1362 that converts a US corporation to pass-through tax treatment. Filed on Form 2553.
Definition
The S corporation election is a federal tax election made under IRC § 1362(a) that allows a domestic US corporation to be taxed as a pass-through entity rather than a separate taxable entity. Income, deductions, gains, and losses flow through to shareholders' personal tax returns. Once made, the corporation files Form 1120-S rather than Form 1120. Eligibility is restricted: 100 shareholders maximum, US citizens or residents only, single class of stock, domestic corporation only.
Same concept, different references
| US (IRC) | Section 1361 — S corporation defined |
|---|---|
| US (IRC) | Section 1362(a) — Election to be S corporation |
| Filing | Form 2553 — Election by a Small Business Corporation |
| State | Most states recognize the federal election; some require state-level election |
Eligibility requirements
To qualify for and maintain S status under IRC § 1361:
- 100 shareholders or fewer: spouses and certain family members count as one
- Eligible shareholders: US citizens or residents, certain trusts, and certain estates only — no corporate or partnership shareholders
- Single class of stock: only one class permitted (voting differences are OK, but economic rights must be identical)
- Domestic corporation: must be a domestic US corporation (incorporated in any state)
- Ineligible types: financial institutions using reserve method, insurance companies subject to Subchapter L, possession corporations, and DISCs are ineligible
Filing the election
Form 2553 is filed with the IRS. Filing deadlines:
- For a new corporation: within 2 months and 15 days after the start of the tax year for which the election is to take effect (typically the year of incorporation)
- For an existing corporation: within 2 months and 15 days after the start of the tax year for which the election should apply
- Late election relief: Rev. Proc. 2013-30 provides procedures for late S elections, generally available if reasonable cause exists and the corporation has filed consistently as an S corp
- Shareholder consent: all shareholders at the time of election must sign
S corp vs C corp tax treatment
The fundamental tax differences:
- C corp: corporation pays corporate income tax (21% federal). Dividends to shareholders are taxed again as qualified dividends (up to 20% + NIIT). Double taxation
- S corp: corporation pays no federal income tax. Income passes through to shareholders, taxed at their individual rates
- QSBS: Section 1202 QSBS gain exclusion is available only for C corp stock, not S corp stock
- Reasonable comp requirement: S corp shareholder-employees must take W-2 wages before profit distributions
In Octelligence
Track the S election in the corporate record.
Octelligence captures the Form 2553 election date, shareholder consents, and the corporate status in the company record, with the audit trail that supports the federal election if questioned.
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Section 351, F reorganization, 338(h)(10), S corp election, AAA, 199A, 1244, BIG tax. Recorded against the corporation, surfaced when relevant.