Yes, a California LLC taxed as an S-Corp can be formed after March 15th!

It is a common misconception found online that a California LLC taxed as an S-Corp cannot be formed after March 15th each year. This misinformation likely stems from a misunderstanding of tax deadlines related to S Corporation elections for small businesses, and it is a common question the experienced corporate attorneys at San Diego Corporate Law are asked.

This article outlines the S Corporation election deadlines for both existing and newly formed California LLCs and provides guidance on necessary filings and deadlines regarding the question: Can a California LLC taxed as an S-Corp be formed after March 15th?

Executive Summary: Putting the Conclusion First for Busy California Business Owners

• The deadline for filing IRS Form 2553 for S Corporation election for an existing California LLC is March 15th, which is seventy-five days after the start of the calendar year (the fifteenth day of the third month of the calendar year) to adopt S-Corp status commencing in that calendar year.
• The deadline for filing IRS Form 2553 for S Corporation election for a newly formed California LLC is seventy-five days after the date of organization to adopt S-Corp status commencing on the date of incorporation.
• Late filing of IRS Form 2553 is possible under certain revenue procedures.

What Is an S Corporation Election?

An S Corporation election transforms how the Internal Revenue Service and California Franchise Tax Board tax a California LLC. Rather than being disregarded for tax purposes, being taxed as a partnership, or facing double taxation (which is federal income tax and California income tax at the California Corporation level and taxation of dividends at the ownership level), California LLCs taxed as S-Corps enjoy pass-through taxation where the net income of the California LLC flows directly to the personal income tax returns of the members and federal income tax and California income tax are paid once at the member level.

Key Features of S Corporation Taxation:

• Pass-through taxation: No corporate-level federal income tax; taxes paid on personal tax returns
• Self-employment tax savings: Reasonable salary requirements reduce the amount to pay self-employment tax
• Loss deductions: Business losses offset other income on personal returns
• Single level of taxation: Eliminates double taxation on profits

The S Corporation election does not change the corporate structure under California law. The California LLC remains the same legal entity with identical liability protections, governance requirements, and professional responsibilities both before and after the S Corporation election.

Benefits of S Corporation Election for California LLCs

LLCs in California can realize substantial benefits through S Corporation election. These advantages become particularly valuable as net income grows.

Tax Savings Through Reduced Self-Employment and Payroll Taxes with a California LLC taxed as an S-Corp

California LLC taxed as an S-Corp members who work in the business must receive reasonable compensation as W-2 employees. This salary is subject to payroll taxes at a combined rate of 15.3% for Social Security and Medicare. However, additional profits distributed to the members are not subject to self-employment taxes or payroll taxes.

Example: Generating a $150,000 annual net profit as a sole proprietor or LLC disregarded for tax purposes or taxed as a partnership results in $22,950 in self-employment taxes. Generating the same $150,000 annual net profit with a California LLC taxed as an S-Corp and paying a $50,000 reasonable salary results in $7,650 in payroll taxes, which is a savings of $15,300 per year!

Example: Generating a $100,000 annual net profit as a California LLC taxed as a C Corporation (without S Corporation taxation) results in a 21% federal corporate income tax rate and 8.82% California corporate income tax rate, leaving $70,180 for distribution to the members in the form of dividends, which dividends would then be taxed at the federal dividend rate for that member and as income (California taxes all dividends as ordinary income). Generating the same $100,000 net profit with a California LLC taxed as an S-Corp would lead to one level of taxation at the member level for both federal income tax and California income tax, which is generally more tax efficient than double taxation when it is time to pay taxes.

Pass-Through of Losses and Deductions

New businesses often face significant startup costs, equipment purchases, or temporary income reductions. A California LLC taxed as an S-Corp allows these losses to flow through to the personal income tax returns of the members, potentially offsetting other income sources.

Simplified Tax Reporting

California LLCs taxed as S-Corps file tax returns on Internal Revenue Service Form 1120S and California Franchise Tax Board Form 100S, but typically pay no federal income tax at the corporate level. Members receive Schedule K-1 forms showing their share of income, deductions, and credits. This simplifies tax planning compared to California LLCs taxed as C Corporations.

Understanding the S Corporation Election Deadline for Existing California LLCs

Existing California LLCs may switch to the S Corporation tax structure by filing Internal Revenue Service Form 2553 no more than 2 months and 15 days after the beginning of the tax year the election is to take effect. For California LLCs with tax years on the calendar year, the deadline is March 15th to file for the election for the current tax year.

If the election is not made by this date, the California LLC will continue to be taxed in its default or previously elected tax structure for the entire current year. However, if the S Corporation election is made in time, the California LLC can enjoy S-Corp taxation for the current and all subsequent tax years.

Choosing S Corporation tax treatment offers several advantages for California LLCs, not the least of which is the pass-through taxation structure of California LLCs taxed as S-Corps, which allows profits and losses of the California LLC to flow through to the personal income tax returns of the members. This can result in significant tax savings for the members.

Just like California LLCs taxed as C Corporations, California LLCs taxed as S-Corps offer limited liability protection to members, meaning members are not personally liable for the debts, liabilities, obligations, and legal judgments of the California LLC taxed as an S-Corp.

Understanding the S Corporation Election Deadline for Newly Formed California LLCs

Recently formed California LLCs may elect to be taxed as S Corporations at any time of the year, however, it is important to understand the deadline for making the S Corporation election for a newly formed California LLC.

Newly formed California LLCs may elect the S Corporation tax structure by filing Internal Revenue Service Form 2553 no more than 75 days after the organization date of the California LLC (the effective date of the Articles of Organization filed with the California Secretary of State). For example, a California LLC that was organized on October 1st has until December 16th to file the election to be treated as a California LLC taxed as an S-Corp for the year of organization and every subsequent year thereafter.

If the election is not made by this date, the California LLC will be disregarded for tax purposes if a single member California LLC or taxed as a partnership if there are two or more members for the current year and every subsequent year thereafter until it successfully completes an S Corporation election for a subsequent tax year. This could result in a higher tax liability for the California LLC and its members.

The S Corporation election allows a California LLC to be taxed as a pass-through entity, meaning that profits and losses are reported on the individual income taxes returns of members rather than at the corporate level. This can result in significant tax savings for both the California LLC and its members.

However, in order to take advantage of this tax treatment, California LLCs must make the S Corporation election to be treated as a California LLC taxed as an S-Corp by the deadline.

Understanding Late S Corporation Election Revenue Procedures

Recognizing that business owners can make honest mistakes, the Internal Revenue Service created Revenue Procedure 2013-30. This procedure provides a simplified method for certain business entities, such as California LLCs, to obtain relief for a late S Corporation election without needing a formal private letter ruling from the Internal Revenue Service, which is both costly and time-consuming.

Essentially, Rev. Proc. 2013-30 allows a California LLC that missed the Internal Revenue Service Form 2553 filing deadline to have its S Corporation election treated as timely, provided it meets specific criteria.

Eligibility for Rev. Proc. 2013-30 Relief for California LLCs

To qualify for relief under Rev. Proc. 2013-30, a California LLC must meet several conditions. The most crucial conditions for eligibility are:

1. The California LLC intended to be a California LLC taxed as an S-Corp from its effective date. Members of California LLCs cannot decide in December that they should have been a California LLC taxed as an S-Corp all year to save on taxes. Members must demonstrate that the failure to timely file Internal Revenue Service Form 2553 was an oversight, but mere inadvertence also does not qualify.
2. The California LLC had reasonable cause for its failure to file on time. This could include relying on an accountant or online service that failed to file, a misunderstanding of the requirements, or other similar situations.
3. The request for relief must be filed within three years and 75 days of the intended effective date. If this extended deadline is missed, seeking relief becomes much more difficult.

How to File for Relief Under Rev. Proc. 2013-30

If a California LLC meets the eligibility criteria above, it can seek relief by following these steps:

Step 1: Complete Internal Revenue Service Form 2553

Fill out Internal Revenue Service Form 2553 as should have been done for a timely election. Ensure all member consent information is completed and signed.

Step 2: Attach a Reasonable Cause Statement

At the top of the first page of Internal Revenue Service Form 2553, write “FILED PURSUANT TO REV. PROC. 2013-30.”

Next, attach a statement explaining why the S Corporation election on Internal Revenue Service Form 2553 was not filed on time. This statement is critical and should address the eligibility requirements, including those outlined above. The reasonable cause statement must be signed under penalty of perjury by an authorized officer of the California LLC or a member. The statement should clearly explain:

• That the California LLC had reasonable cause for failing to file a timely election.
• That the California LLC has always acted consistently with its intention to be treated by all purposes as a California LLC taxed as an S-Corp (e.g., filed member tax returns as if the S Corporation election were in place).

All members must also sign statements confirming they have reported their income consistent with an S Corporation election on all relevant tax returns.

Step 3: File the Internal Revenue Service Form 2553 and Reasonable Cause Statement

File the completed Internal Revenue Service Form 2553 with the attached reasonable cause statement at the Internal Revenue Service service center designated in the instructions for Internal Revenue Service Form 2553. NOTE: An Internal Revenue Service Form 2553 is NOT filed with a tax return.

The Internal Revenue Service reviews Rev. Proc. 2013-30 requests and will reply via First Class Mail. If approved, the Internal Revenue Service sends a notice that the California LLC is not considered a California S-Corp along with the effective date for the S Corporation election. Notices should be carefully reviewed, as most denied Rev. Proc. 2013-30 requests receive similar notifications, but with future effective dates.

Avoiding Missed Deadlines for Your California LLC Taxed as an S-Corp

While Rev. Proc. 2013-30 is a valuable safety net, it is far better to avoid needing to request a late S Corporation election in the first place. Here are a few tips to stay on track:

• Consult Professionals Early: Engage with an experienced corporate attorney as soon as you decide to form your California LLC taxed as an S-Corp. They can advise you on the best entity structure and manage the necessary filings, including the Internal Revenue Service Form 2553 S Corporation election.
• Be Responsive to Your Attorney: You hired a professional to handle your filings, but even the best attorney cannot complete Internal Revenue Service Form 2553 without you! The S Corporation election must be signed by an officer of the California LLC and each of the members, so be sure to complete the signatures and return the form to the attorney for filing without delay.
• Look for Notifications from the Internal Revenue Service: After Internal Revenue Service Form 2553 is filed, whether timely or in conjunction with Rev. Proc. 2013-30, watch your mail for a notice from the Internal Revenue Service. S Corporation election notices are sent directly to the California LLC and not to the attorney making the filing.

Making a timely S Corporation election is a fundamental step in setting a California S-Corp up for tax efficiency. Make the S-Corp election deadline timely to ensure a simple mistake with the S-Corp election form does not derail the plan to elect S Corporation status.

Form Your California LLC with Confidence – Trust the Experienced Attorneys at San Diego Corporate Law!

Ready to form your California LLC taxed as an S-Corp? Let the experienced attorneys at San Diego Corporate Law guide you every step of the way with expert business formation service for your business structure. Start today by contacting us for an initial consultation!