When Can a LLC Be Taxed as an S Corporation?

When Can a LLC Be Taxed as an S Corporation?
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A limited liability company (LLC) can be taxed as an S corporation when the members elect to be taxed as a subchapter S corporation. You have to ask to be taxed that way, because LLCs are not recognized by federal laws. It’s a business structure created by state laws, and as far as taxes go, your business is not an LLC. It’s either a corporation or partnership, or you can file as a single owner who wants to be “disregarded as a separate entity” for tax purposes. That means you’ll be treated as a sole proprietor.

Form 2553: Election by a Small Business Corporation

An LLC cannot be taxed as an S corporation, unless Form 2553 is filed and signed by the owners of the LLC. The name is a bit misleading for LLCs, but it’s the only form you’ll want to use if you want the LLC to be taxed as an S corporation. You have to file it on time if you want the IRS to recognize the S corporation status for the tax year. The deadline is either:

  • Within two months and 15 days after the tax year begins when you want the election to go into effect, or
  • Anytime before the tax year you want the election to go into effect

You can ask for relief for filing late, but the IRS has strict rules on accepting late forms. Avoid any hassles by filing Form 2553 on time.

Don’t Use Form 8832

A common form that LLCs use to elect how they want to be classified for tax purposes is Form 8832. If LLCs don’t submit this form to the Internal Revenue Service (IRS), the IRS will look to its own default rules to decide how to classify the LLC. Those rules state that if Form 8832 is not filed, the IRS will classify the LLC in one of two ways:

  • As a partnership (must have at least two members)
  • Disregarded as a separate entity (if there’s only one member)

The S corporation is not listed as an option, so the IRS will look to its default rules to determine which tax laws apply to you. Fill out Form 2553 to elect an S corporation status.

Benefits of S Corporation Status

It may be to your advantage for the LLC to be taxed as an S corporation. Some of the benefits include:

  • Pass business losses to owners, resulting in tax breaks on personal income tax forms
  • LLC members who are not active are not subject to self-employment taxes
  • Active LLC members may pay less in self employment taxes

Get help from a tax attorney before you make your decision either way. The tax savings are significant and therefore it’s worth paying for a half or one hour consultation.

File your taxes using Form 1120S after the LLC is taxed as an S corporation. You’ll also need to report your share of corporate income on Schedule K-1 on Form 1120.