S election not accepted for 2022

Technical topics regarding tax preparation.
#1
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Afternoon! I'm trying to figure out the best approach for a messy S election situation. MMLLC filed 2553 for first year of the business. They say the form was mailed on time, but IRS says it was late. As a result, S election is granted for 1/1/23, but not for 2022. They are currently looking for proof of mailing date.

I know a late election could be filed with the first return, but there are two complications. First is that LLC did not extend the 2022 return, so it's late. Second is that one of the members has already filed 1040 for 2022 and there's nothing for this LLC on that return. If LLC can locate proof of mailing the 2553 timely, I assume paper filing the return with the 2553 and proof of mailing is the way to go (and of course, the member who has already filed needs to amend). If they cannot locate proof of mailing, do I 1) prepare 1120-S; 2) have member who has already filed amend his 1040 to include 1120-S K-1; and only then 3) paper file 1120-S with late election included? Does the fact that the first 1120-S (and first return for the entity) is late mean that the late election will be denied? Any other suggestions that might be more successful?

Thanks for any assistance.
 

#2
KoiCPA  
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A couple of thoughts:

A late filing with a late election doesn't automatically cause it to be rejected. The current Rev Proc actually gives you more than a year to make late elections.

I have heard that the late election does allow for owners to make amendments to 1040 and not just their original filings. Never put it to the test, though.

There will be a penalty for late filing... but if they don't make the S election, they'll be taxed as a partnership, which has basically the same conditions for the penalty and the waiver.

Late elections can be efiled - a PDF copy of the 2553 is attached. That would be better than paper filing. Check your software for the details, but it's definitely preferable in my mind.

Did they do payroll for the owner-employees of the S corp? I've never had a late election denied, but failure to do payroll seems like good grounds for the IRS to assert that they hadn't intended S treatment from the start. If they did do payroll, then rejecting the late election means the IRS forces everyone to amend payroll and income tax returns all around.
 

#3
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Is there any significant consequence if they file a 1065 for 2022 and then start as an S corp for 2023?
 

#4
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They have profits for 2022, so if they file 1065 for 2022, they'll have the additional self-employment tax. Not huge, but they might consider it significant.

They did pay payroll for 2022. If the election is rejected and they have to file 1065, isn't it still pretty much the same outcome in terms of payroll tax collected by the IRS (other than the additional amount on the profits)? Would they really have to amend the payroll?
 

#5
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And unfortunately, I don't believe my Taxact software will allow me to efile with a late election. That would have been my preference, too.
 

#6
KoiCPA  
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If they did payroll, I can't imagine the IRS rejecting the late election.

As for payroll tax and SE tax canceling out... that very much depends on the details. It's possible that they'll be very similar, but SEHI and retirement plans like a SEP can result in big differences because both are excepted from payroll tax for S corp owners, but are subtracted after SE tax is calculated for partners. There can also be issues with the Social Security limit and Additional Medicare tax if income is high enough.
 


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