Modifying Tax Treatment of LLC

[Tax Sleuth]

A client who is the owner and sole member of an established, single member LLC wants his company to be treated as an S Corporation for tax purposes. The LLC is properly set up with the state where he conducts business. It uses the cash method of accounting and is set up in accordance with the calendar year. How long will it take if the client acts now to make this change in his company’s tax treatment and when can the client legitimately start filing the 1120S instead of Form 1040 Schedule C?

[appelman]

See instructions for Form 2553.

At this point, the election will ordinarily apply starting in 2013, if filed any time before the middle of next March.

[DaveinTexas]

Great question

A client who is the owner and sole member of an established, single member LLC wants his company to be treated as an S Corporation for tax purposes. The LLC is properly set up with the state where he conducts business. It uses the cash method of accounting and is set up in accordance with the calendar year. How long will it take if the client acts now to make this change in his company’s tax treatment and when can the client legitimately start filing the 1120S instead of Form 1040 Schedule C?

I read an article on this topic but can't find it right now. The article stated that since the SMLLC has never been a Corporation, the due date for the election is basically 75 days after the election is filed. Essentially, the effective date on the 2553 is the date you file the form.

I will,try to find the well written article but for now I will leave you with some IRs language that supports the theory:

Under Reg. 301.7701-3(c)(1)(v)(C), an eligible entity such as an LLC that timely elects to be an S corporation is treated as having made two elections: (1) electing to be classified as an association taxable as a corporation, and (2) electing to be treated as an S corporation. Under this regulation, both elections will be deemed made on the effective date of the S corporation election (i.e., the effective date shown on Form 2553).

Now if the LLC was already taxed as a C Corp, or if it was a Corporation to begin with thenyour due date formthe elction form is March 15th (or 75 days after the creation of the entity). I hope this helps.

[appelman]

See if you can make sense out of this.

From Form 2553 instructions:

When To Make the Election

Complete and file Form 2553:

No more than two months and 15 days after the beginning of the tax year the election is to take effect, or

At any time during the tax year preceding the tax year it is to take effect.

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 there is no corresponding day, use the close of the last day of the calendar month.

Example 1. No prior tax year. A calendar year small business corporation begins its first tax year on January 7. The two month period ends March 6 and 15 days after that is March 21. To be an S corporation beginning with its first tax year, the corporation must file Form 2553 during the period that begins January 7 and ends March 21. Because the corporation had no prior tax year, an election made before January 7 will not be valid.
Example 2. Prior tax year. 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 two month period ends February 28 (29 in leap years) and 15 days after that is March 15. To be an S corporation beginning with its next tax year, the corporation must file Form 2553 during the period that begins the first day (January 1) of its last year as a C corporation and ends March 15th of the year it wishes to be an S corporation. Because the corporation had a prior tax year, it can make the election at any time during that prior tax year.
Example 3. Tax year less than 2 1/2 months. A calendar year small business corporation begins its first tax year on November 8. The two month period ends January 7 and 15 days after that is January 22. To be an S corporation beginning with its short tax year, the corporation must file Form 2553 during the period that begins November 8 and ends January 22. Because the corporation had no prior tax year, an election made before November 8 will not be valid.