When choosing the right business entity, it is important to understand the positives and negatives of each option. S-corporations (S-Corps) can be a preferred choice for many closely held businesses because of their tax advantages; however, the requirements to qualify as an S-Corp can be more difficult. The IRS gives five requirements for S-Corporation Status:
- Be a domestic corporation
- Have only allowable shareholders
o May be individuals, certain trusts, and estates and o May not be partnerships, corporations or non-resident alien shareholders
- Have no more than 100 shareholders
- Have only one class of stock
- Not be an ineligible corporation (i.e. certain financial institutions, insurance companies, and domestic international sales corporations).
In prior years, those that did not qualify for S-Corp status, or lost their qualification, faced significant fines. Now, the IRS allows for a Simplified Method for Relief. Author Sally Schreiber outlines the requirements of S Corps under this method that makes a corporation not subject to the three-year, 75-day deadline, but instead has no time limit on requesting relief:
- The corporation is not seeking a late corporate entity classification election;
- The corporation fails to qualify as an S corporation solely because Form 2553 was not timely filed;
- The corporation and all of its shareholders reported their income consistent with S corporation status for the year the election should have been made and all later years;
- At least six months have passed since the corporation filed its first S corporation year tax return;
- The IRS did not notify the corporation and the shareholders of any problem with the S corporation status within six months after the return was filed; and
- The completed election form includes statements from all shareholders from the date the election was to have been effective to the date of the filing stating that they have reported their income consistent with S corporation status.
Click here for the full article. For more information on corporation requirements, or setting up a new business, please contract Brian McFarren at (231) 726-5815 or email@example.com.
Brickley DeLong is a West Michigan Accounting Firm, offering personalized accounting services with offices in Muskegon, Hart, and Grand Rapids, Michigan.