Tax Guru – Ker$tetter Letter

Q:

Subject: your article

Mr. Kerstetter,

Allow me to thank you for the information on your blog and website. I have consulted it on several occasion and find it quite helpful.

I have a question about a statement you make in the following article: http://www.taxguru.org/corps/scorp.htm

The article deals with S elections. In the article you say, “…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.”

It was my understanding that a company had a limited time period after formation to make the S election and this appears to conflict with your statement above. Which is correct?

With kind regards,

A:

You are confusing two different things related to S corps.

It is true that a C corp of any age can be converted to an S if it meets the criteria.

However, where you seem to be confused is regarding the effective date of the changeover from a C to an S. For example, if an existing C corp (of any age) wanted to convert to S status as of 1/1/10, the 2553 signed by all of the shareholders would have had to be filed with IRS by 3/15/10 at the latest.

A 2553 can always be filed in advance of the effective date; but the deadline that trips most people up is when they want to make the election retroactive to a time before the 2553 is actually submitted.

As I have said many times, I am not a big fan of converting C corps to S. While it is legal to do so, this especially goes for long established C corps because of the many complications of accounting for items carried into the new corp status, such as retained earnings, NOLs, and appreciated assets, with their potential built in gains tax consequences. This is why I normally find it much simpler to set up a brand new corp that can elect the S status with no previous “baggage” to worry about.

As always, any plans having to do with the election or revocation of an S status should be discussed and analyzed very carefully with the assistance of an experienced professional tax advisor.

I hope this helps clear things up for you.

Kerry Kerstetter

Follow-Up:

Thank you, Mr. Kerstetter. That clears things up.

With kind regards,