New S-Corp Tax Election

[edwindelcarpio]

I have a new client who operated as a sole proprietor in 2016 until November 2, 2016, when my client filed his paperwork to form an LLC. The client now would like to file Form 2553 to be taxed as an S-Corp.

My issue with selecting the effective date. From my understanding, forming an LLC in November that would be mean the tax year is less than 2 1/2 months (and hence a short tax year), and because of this I cannot have the effective date of the election before November 2. Is this correct?

Thanks for your help.

[TaxGuyBill]

The business (LLC) did not exist until November 2nd, so that is the earliest that it can elect to be taxed as an S-corporation. It can not do anything before it existed.

[edwindelcarpio]

The business (LLC) did not exist until November 2nd, so that is the earliest that it can elect to be taxed as an S-corporation. It can not do anything before it existed.

Much appreciative for the quick response! Would that mean I would have to file a Schedule C for the activity between January and November 1st and then file an 1120s for November and December's activity? I believe it would be prudent to advise the client to elect S-Corp status beginning in the 2017 tax year given the short tax year.

[TaxGuyBill]

Yes, file Schedule C for the entire period before the S-election is effective, and an 1120-S from the effective date to the end of the year. If the election is made to be effective January 1st, 2017, then the Schedule C would cover all of 2016.

Yeah, I suspect that waiting until January will be cheaper for the taxpayer and easier for both of you.