S-Corp Election retroactive to 1/1/2023

[kizfaka]

Hello.

I created an LLC with an formation date of 6/22/2023.

I am in the process of completing form 2553 to file for S-Corp treatment.

I would like to make my S-Corp election to be effective for the beginning of the tax year (1/1/2023) instead of the my company's formation date (6/22/2023).

Is this possible?  If so, how?

Thank you.

[tagteam]

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@kizfaka wrote:

I would like to make my S-Corp election to be effective for the beginning of the tax year (1/1/2023) instead of the my company's formation date (6/22/2023).

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You cannot make an S corporation election that would be effective for a date prior to the formation of your eligible entity.

Ref: Section 301.7701-3

[kizfaka]

I am hoping to begin payroll as an S-Corp for next month (August).  Prior to that, from Jan-July, my income was earned as a sole proprietor.   I spoke with an accountant who said that income (from Jan-July) would would be shown as Nominee income (earned by me on behalf of the s-corp) and not be subject to self-employment tax.  That sounds great.   

First question:  Does this sound legitimate?

Second question: Would this require my S-Corp to have an effective date of 1/2/2023 to work?  

[tagteam]

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@kizfaka wrote:

First question:  Does this sound legitimate?

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No, it does not exactly sound legitimate and, personally, I would question the accountant as to what he is relying on in terms of authority for the position proffered. 

I am certain, however, that you would need have an eligible entity in order to make an S corporation election and a sole proprietorship is not such an entity. 

I am going to page @Rick19744 for his input on this entire issue.

[kizfaka]

I do have an eligible entity with an effective date of 06/22/2023.  

The goal is of course to save of payroll tax earned during the 2023 tax year before starting my S-Corp.  I have heard this strategy from 3 different accountants; two accounts used the term "nominee income" and one said that the income earned prior to forming the S-Corp would be labeled as "bonus" income on my S-Corp.  

But I can't find any information about this using my own research.   

[tagteam]

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@kizfaka wrote:

I do have an eligible entity with an effective date of 06/22/2023. 

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Yes, but you did not have an eligible entity prior to that date in June. Therefore, no eligible entity that can elect S corporation status (for federal income tax purposes).

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@kizfaka wrote:

But I can't find any information about this using my own research.   

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That, in itself, should be a red flag, but your accountant(s) should be able to provide authority for the proposition (if not, then that flag gets larger and bright red).

Frankly, the stated goal may violate the economic substance doctrine; a taxpayer cannot simply change entity or business classifications for the sole purpose of reducing tax liability and nothing more.

[Mike9241]

did you form a corporation that is election S-Corp or an LLC that is electing to be taxed as an S-Corp

from 2553

E Election is to be effective for tax year beginning (month, day, year) (see instructions) . . . . . . ▶
Caution: A corporation (entity) making the election for its first tax year in existence will usually enter the
beginning date of a short tax year that begins on a date other than January 1.

the election is supposed to be file with 75 days of the start of the tax year which for a corporation would be the date of incorporation. a late election may be allowed if filed after the 75 days but the start of the tax year would still be 6/22

moving money earned before incorporation to the corporation could result in severe tax problems. 

now i have seen some threads that infer an LLC formed during the year or a sole proprietorship, can attempt to make a Late S-Corp election and then all income for the year would be reported on the S-Corp return

[Rick19744]

There is a lot to unwrap here, and unfortunately a forum such as this is not really conducive as there are just too many questions:

• In order to make an S election, there needs to be an eligible entity.  An LLC can be such an entity, but there needs to be a specific election to be taxed as an association, then make the S election.
• You indicate that you have "an eligible entity effective 6/22/2023". 
  • What exactly does this mean?
  • What was filed in order to be an eligible entity on the date noted?
  • You just indicate that you are in the process of completing a form 2553.
  • Did you have an operating agreement for the LLC?
  • If you did, was this operating agreement amended to make sure that there is no mention of the ability to make special allocations?  Many operating agreements are just boiler plate, and if not adjusted, may invalidate the S election if audited due to the possibility of having more than one class of stock.
  • Since you indicate "I", the assumption at this point is that you formed a single member LLC and most likely do not have any operating agreement?
• It is possible to receive income as a nominee.  However, I am fairly sure at this point you don't have any documents dated in January 2023 that state that the S corporation is the nominee for the income.  Just not possible, as there was no S corporation at that time.  Don't allow anyone to tell you that the document can be backdated.  That would be tax avoidance, for the simple fact that this is just now being discussed.
• I would also question the ability to receive  "bonus income".   Same situation.  How can you receive bonus income as an employee of the S corporation when it wasn't even around.
• I would not recommend anything other than filing as the facts warranted.
• I don't have a problem with "gray", but I don't see anything gray here.
• I also agree with @Mike9241 where you can request a late election, but since there was no LLC in January, not sure this is possible.
• Next time just make sure you meet with a tax professional before you make any decisions that have tax implications.

[tagteam]

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@Mike9241 wrote:

now i have seen some threads that infer an LLC formed during the year or a sole proprietorship, can attempt to make a Late S-Corp election and then all income for the year would be reported on the S-Corp return

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Yes, but the threads, at least those I have read, involve an eligible entity that is already in existence (e.g., an LLC) when the S corporation election was made. 

So, you could have an LLC formed earlier in a given tax year and, sometime later, file a Form 2553 such that all income/expense would be reported on an 1120-S. I'm not sure how that could possibly happen if the LLC was not in existence at that earlier date.

Regardless, @kizfaka either needs to seek counsel from different (i.e., "better") tax professionals or request that the accountants support their arguments with something authoritative (such as the Code, Regs, et al).