A brand new year is ahead, which means you’re probably fielding questions from your business clients about how they can improve their tax situation. This especially may be true of clients who operate as sole proprietorships, partnerships, or LLCs. While the pass-through tax treatment and 20 percent deduction on qualified business income (thanks to the 2017 tax code changes) might have helped them, they might still be feeling the sting of paying self-employment tax on all of their profits.
So, now is an excellent time to talk about the advantages of the S Corporation election for 2020. The S Corp election filing deadline is fast approaching for existing LLCs and corporations.
What is an S Corporation?
Your clients have surely heard of the term “S Corporation,” but many might not know precisely what it means to be one. You may need to give them some initial information to lay a foundation of understanding before you talk about the tax implications.
Here’s a quick overview:
An S Corporation is not a separate type of business entity but instead a special election that an LLC or corporation makes through the IRS. To become an S Corp, a corporation must file Form 2553 (Election by a Small Business Corporation). An LLC must first submit Form 8832 (Entity Classification Election) to identify it wants to be classified as a corporation for federal tax purposes and then file Form 2553. An S Corporation’s corporate income, losses, deductions, and credits flow through to its shareholders (owners). The business doesn’t pay taxes at the corporate rate on its profits, so S Corporations avoid the “double taxation” that applies to corporations that don’t request S Corp election.
For owners of LLCs, sole proprietorships, or partnerships who pay self-employment tax on all of their business profits, S Corp tax treatment may minimize their tax burden. Note that sole props and partnerships would have to form an LLC or incorporate before they are eligible to elect S Corp tax treatment. And, anytime there is a change in business structure in addition to a tax election change, the process becomes more involved, and clients should make sure they understand the legal ramifications and compliance requirements. I recommend that your clients talk with an attorney to ensure they choose the entity type that will benefit them the most from a legal perspective as well as from a tax standpoint.
Eligibility Requirements for an S Corp Election
Corporations and LLCs that want S Corp pass-through taxation must meet the IRS’s eligibility criteria. Several of those requirements include:
- Must be a domestic corporation (and not one that is ineligible such as certain financial institutions, insurance companies, and domestic international sales organizations)
- May not have more than 100 shareholders
- May not have shareholders that are non-resident aliens, partnerships, or corporations
- May only have one class of stock
S Corporation Election Deadline
For the S Corp election to be valid for 2020, existing LLCs and corporations (with a tax year that began on January 1) will need to file IRS form 2553 no later than March 15, 2020.
If you have clients who want to wait to have S Corp election effective starting in 2021, they can file any time during 2020.
Clients who start a new business in 2020, have two months and 15 days from their date of formation to file for S Corporation tax treatment for the rest of the year.
You can find additional details in the Form 2553 instructions on the IRS website.
How You Can Help Your Clients
Time is of the essence to ensure your clients take steps to optimize their tax situation in 2020. Offer your expert guidance to steer them in the right financial direction. Also, consider providing your clients with additional value while adding additional revenue to your bottom line by signing up for the CorpNet Partner Program. Choose to either resell CorpNet’s business formation and compliance services (which include filing for S Corp election) or become a referral partner.
Equipped with your insight and the legal advice they need from a trusted attorney, your business clients will be on the road to enhanced success in the near year.
This article was originally posted on LatinoTaxPro at https://latinotaxpro.com/blogs/news/2020-s-corp-election-deadline-now-is-the-time-to-talk-with-clients.