Filed 2553, but not sure if we should act as S-Corp

I have a client who decided in April 2021 that they wanted to bring in a new shareholder on July 1, 2021 and move from a partnership to an S-Corp. Their year end is 12/31. I filed the 2553 in April & requested consideration for the late filing (rev proc 2013-30). As you would imagine, we still haven't heard anything from the IRS here in June 2021. My client is very anxious about whether or not they'll be granted the S-election for 2021 as that will affect the deal with this new S/H.

If read numerous anecdotal stories about CPA's filing the 2553 timely and then immediately beginning that client on payroll & then filing the 1120-S despite not having heard anything from the IRS by the filing deadline for the 1120-S. With how backed up the IRS has been recently, I don't expect them to issue a determination on the 2553 any time soon.

Giving that we filed the 2553 late & are requesting late consideration, and given my client's circumstance of adding another S/H this year, would you tend to move forward with this client under the assumption they'll be an S-Corp (e.g. begin payroll; file an 1120-S for tax year 2021; etc), or would you urge them to wait to make any changes until we've received a ruling from the IRS?

Isn't it automatic?

JR1 - My understanding is that it is only automatic if you file it within the 2.5 month window from the client's year-end.

JR1 - My understanding is that it is only automatic if you file it within the 2.5 month window from the client's year-end.

I have yet to hear of a late 2553 not being accepted, assuming you meet the criteria of the ruling. I wouldn't have any anxiety about this arrangement.

That's what I thought, too. It is an automatic for late election as long as you meet the requirements, which most everyone does. So I wouldn't worry about it....tho' we all love to have that acceptance in the file.

For an LLC taxed as a partnership: Making an S election is actually 1) making an election to be taxed as a corporation, and 2) the corporation making an S election.

#1 can happen at any time, even retroactive back to 75 days without being late. You could do a Form 8832 for this, but the IRS says that's not necessary for this exact situation. The Form 2553 will automatically include the 8832 election.

#2 S election can be effective starting when the corporation's first year starts, which isn't until the effective date of #1.

Not sure if I missed it - did you want the effective date to be 1/1/2021 or 7/1/2021?

So you've got until mid-September to timely file a Form 2553 with an effective date of 7/1/2021. Since it's timely, the IRS should accept it no problem, so you could start operating immediately on the effective date under the assumption that it is an S corporation, regardless of whether you've heard from the IRS.