Tax Guru – Ker$tetter Letter

Helping real people win the tax game.

Posted by taxguru on January 17, 2003

S Corporations

Lately, I have been receiving a lot of feedback from various people around the country who have read my article describing some of the big differences between C and S corporations, thanking me for pointing out things that other advisors have been ignorant of. One area of confusion still seems to be regarding exactly when a corporation becomes an S. Many people believe that the decision to be an S or a C is made at the time when the corporation is originally formed. That is not true. All corporations, when originally chartered by the State, are C corporations. Do nothing extra and it will remain a C corp.

However, to convert it to an S corporation, the shareholders must all sign and submit Form 2553 with the IRS to request that status. This can be done right away after the corp is originally chartered, or several years down the road. You need to be sure to watch the effective dates of the S election. Some States automatically accept the IRS’s S election, while others require a separate form to be submitted to the State tax agency.

If a corp has been using a fiscal year that ends in a month other than December, it will have to change to a 12/31 fiscal year end if it changes to an S status. If the S status is later revoked, you will not be allowed to change from the 12/31 year end.

KMK

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