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Question for the Money Doctors

Question submitted on Mar 4, 2012.

Question

RE: Late Election of S-Corp Status by LLC. Would the IRS consider it “reasonable cause” if the S-Corp election Form 2553 was submitted by a single-member disregarded entity LLC beyond the required timeframe but stating as the cause for late submission that (1) the LLC was newly formed in the prior tax year and had no Income in that prior tax year, and (2) that the LLC requesting S-Corp status has had no Income in the current tax year before submitting Form 2553 requesting S-Corp status for the current tax year? In summary, is the lack of Income in the prior tax year when the LLC was formed, and no Income in the current tax year before submitting Form 2553, “reasonable cause” was not submitting Form 2553 in the required timeframe?

Answer

The answer to your question hinges on the rule that only a corporation (or other entity treated as a corporation) may make an election to be an S Corporation.

Since your entity was formed as a Single Member LLC (SMLLC), the IRS treats your SMLLC as a disregarded entity.  Your SMLLC was disregarded; it was not a corporation eligible to make an S Corporation election.

The good news is that your LLC may file Form 8832, Entity Classification Election and make an election to be taxed as a corporation.  After this election, your SMLLC will now be eligible to file Form 2553 to elect Subchapter S status within the newly established 2½-month deadline.  Your Subchapter S election will not be late.  Please refer to http://www.irs.gov/businesses/small/article/0,,id=158625,00.html.

Also, please don’t overlook the state tax ramifications of your Federal tax elections.  We recommend that you confirm the appropriateness of the Subchapter S election in conjunction with your home state tax rules with a local qualified CPA/PFS. 


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