S Corporation Tax Year Rules

The corporation (entity) will also be notified if its election isn’t accepted. The corporation (entity) should generally receive a determination on its election within 60 days after it has filed Form 2553. If box Q1 in Part II is checked, the corporation (entity) will receive a ruling letter from the IRS that either approves or denies the selected tax year. When box Q1 is checked, it will generally take an additional 90 days for the Form 2553 to be accepted.

To request relief for a late election, a corporation that meets the following requirements must explain the reasonable cause for failure to timely file the election and its diligent actions to correct the mistake upon discovery. A calendar year small business corporation has been filing Form 1120 as a C corporation but wishes to make an S election for its next tax year beginning January 1. The 2-month period ends February 28 (29 in leap years) and 15 days after that is March 15.

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This makes sense because businesses wouldn’t want to close their books right in the middle of a business season just because it falls on the end of the year. A corporation that doesn’t have a 47-month period of gross receipts can’t automatically establish a natural business year. Enter the number of shares of stock each shareholder owns on the date the election is filed and the date(s) the stock was acquired. An entity without stock, such as a limited liability company (LLC), should enter the percentage of ownership and date(s) acquired. A late election to be an S corporation generally is effective for the tax year following the tax year beginning on the date entered on line E of Form 2553.

General Instructions

However, relief for a late election may be available if the corporation can show that the failure to file on time was due to reasonable cause. That way the beginning of the next year it can start fresh with zero balances in all its income statement accounts. Closing the books on an annual calendar year basis works well for companies that aren’t seasonal and don’t have large variations in sales throughout the year.

A late election to be an S corporation and a late entity classification election for the same entity may be available if the entity can show that the failure to file Form 2553 on time was due to reasonable cause. Relief must be requested within 3 years and 75 days of the effective date entered on line E of Form 2553. The benefit of choosing a natural business year is that it can make it easier for a company to close its books and complete its annual financial audit during a quieter period.

Corporation

Generally, send the original election (no photocopies) or fax it to the Internal Revenue Service Center listed below. If the corporation (entity) files this election by fax, keep the original Form 2553 with the corporation’s (entity’s) permanent records. However, certain late elections can be filed attached to Form 1120-S. A calendar year small business corporation begins its first tax year on November 8. The 2-month period ends January 7 and 15 days after that is January 22.

Because the corporation had a prior tax year, it can make the election at any time during that prior tax year. The representations listed in Part IV must be attached to a late corporate classification election intended to be effective on the same date that a late S corporation election was intended to be effective. For more information on making these late elections, see Relief for a Late S Corporation Election Filed By an Entity Eligible To Elect To Be Treated as a Corporation, earlier.

The election can be attached to the first Form 1120-S for the year including the effective date if filed simultaneously with any other delinquent Forms 1120-S. If your business does experience sales cycles and the natural low period doesn’t fall on December 31st, picking a fiscal year could be well worth your while. Your fiscal year should end at the time of the year when inventory is lowest—so there’s less to count—and when slow-moving inventory is easiest to spot. Catching up on things like accounts receivable, returns and outstanding balances is also easier when business is at a low point.

It also enables the company’s year-end financial statements to give a more accurate picture of the company’s annual performance, without being distorted by temporary peaks or troughs in activity that occur at other times of the year. For an election filed before the effective date entered for item E, reference ranges for blood tests only shareholders who own stock on the day the election is made need to consent to the election. To request relief for a late election, an entity that meets the following requirements must explain the reasonable cause for failure to timely file the election and its diligent actions to correct the mistake upon discovery. This information can be provided on line I of Form 2553 or on an attached statement.

For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. The deemed owner of the QSST must also consent to the S corporation election in column K of Form 2553. Check the box that corresponds with the S corporation’s selected tax year. If box (2) or (4) is checked, provide the additional information about the tax year, and complete Part II of the form. For the latest information, go to IRS.gov/Filing/Where-To-File-Your-Taxes-for-Form-2553..

Picking a fiscal year that aligns with your natural business year can also make your business look better on the financial statements you hand over to investors and creditors. December 31st might happen to be that day for your business, but for many businesses it isn’t. This is just an example and the actual choice of the fiscal year can depend on several other factors such as tax considerations, industry practices, parent company’s fiscal year (in case of a subsidiary), etc. It is practical to have the accounting and financial reporting year match the natural business year. An accounting and financial reporting year ending on a date other than December 31 is referred to as a fiscal year. Many companies have a natural business year of January 1 through December 31.

Businesses that are seasonal usually have really obvious natural business years, while businesses that don’t experience high or low periods don’t. To become a calendar year taxpayer, all you have to do is file your business tax return by April 15th following the year for which you’re filing. This means that a company opens its books on January 1st and closes its books on December 31st. You might remember from the accounting basics course that at the end of the every year filing back taxes a company makes closing journal entries to close revenue and expense accounts to its retained earnings or capital accounts. The election can be filed with the current Form 1120-S if all earlier Forms 1120-S have been filed.

Obtaining Automatic Approval of Fiscal Year

If you filed your last return using the calendar year and want to switch to a fiscal year, or you run a sole proprietorship, you have to get IRS approval to use a fiscal year by filing Form 1128. If you are making more than one QSST election, use additional copies of page 4 or use a separate election statement, and attach it to Form 2553. If the corporation (entity) hasn’t received its EIN by the time the return is due, enter “Applied For” and the date the EIN was applied in the space for the EIN. A corporation or other entity eligible to elect to be treated as a corporation may elect to be an S corporation only if it meets all the following tests. The income of an S corporation generally is taxed to the shareholders of the corporation rather than to the corporation itself. For details, see Tax and Payments in the Instructions for Form 1120-S, U.S.

1. To request relief for a late election, an entity that meets the following requirements must explain the reasonable cause for failure to timely file the election and its diligent actions to correct the mistake upon discovery.
2. The reduced amount of audit work means that audit fees can be reduced.
3. If there is no corresponding day, use the close of the last day of the calendar month.
4. The income of an S corporation generally is taxed to the shareholders of the corporation rather than to the corporation itself.
5. At this point, more receivables than usual have been converted into cash, and inventory balances have been drawn down.

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Instead, most retailers chose to have natural business year ends ending on January 31. This way the entire busy season is captured in a single year’s financial statements. If you need a continuation sheet or use a separate consent statement, attach it to Form 2553. It must contain the name, address, and EIN of the corporation (entity) and the information requested in columns J through N of Part I. A corporation (entity) not making the election for its first tax year in existence that is keeping its current tax year should enter the beginning date of the first tax year for which it wants the election to be effective. For this purpose, the 2-month period begins on the day of the month the tax year begins and ends with the close of the day before the numerically corresponding day of the second calendar month following that month.

If the end of your natural business year isn’t obvious, a fiscal year might still be better than the standard calendar year. If you run an S corporation or a partnership, you’ll have to file Form 8716 to switch to a fiscal year. To get through the rigors of tax season, CPAs depend on their tax preparation software. Shaun Conrad is a Certified Public Accountant and CPA exam expert with a passion for teaching. After almost a decade of experience in public accounting, he created MyAccountingCourse.com to help people learn accounting & finance, pass the CPA exam, and start their career.