S-Corporation Election Package (Form 2553 + State S-Election) - Alabama

S-CORPORATION ELECTION PACKAGE — ALABAMA

OVERVIEW

An S corporation election allows a qualifying corporation (or an eligible entity that elects to be taxed as a corporation) to pass its income, losses, deductions, and credits through to shareholders, generally avoiding federal entity-level income tax (the "double taxation" of a C corporation). The federal election is made by filing IRS Form 2553 under 26 U.S.C. § 1362(a).

Why elect S status:

• Pass-through taxation — generally no entity-level federal income tax (26 U.S.C. § 1363).
• Potential self-employment-tax savings on distributions versus a sole proprietorship or partnership (subject to the reasonable-compensation rules).
• Limited liability is preserved at the entity level.

Key federal limitations: ≤ 100 shareholders; one class of stock; only eligible shareholders; domestic eligible corporation.

Alabama overlay (summary): Alabama recognizes the federal S election (no separate state election); the Alabama S corporation files Form 20S; nonresident shareholders are addressed via the composite return Form PTE-C (5% under Ala. Code § 40-18-176) or a Schedule NRA opt-out consent; the entity may optionally elect to pay the Electing Pass-Through Entity (PTE) tax (Act 2021-1).

Corporation Identifying Information

PART 1 — FEDERAL ELIGIBILITY CHECKLIST (26 U.S.C. § 1361)

Confirm every item before filing Form 2553. If any item cannot be checked, the entity is not eligible and the election should not be filed until the defect is cured.

Entity Eligibility

☐ The entity is a domestic corporation (or an eligible domestic entity, e.g., an LLC, that will be treated as a corporation) — § 1361(b)(1).
☐ The entity is not an ineligible corporation (not a bank/thrift using the reserve method of accounting for bad debts, not an insurance company taxed under subchapter L, not a possessions-tax-credit corporation, not a current/former DISC) — § 1361(b)(2).
☐ The entity has only one class of stock (differences in voting rights alone are permitted; differences in distribution/liquidation rights are not) — § 1361(b)(1)(D), Treas. Reg. § 1.1361-1(l).

Shareholder Count

☐ The entity has no more than 100 shareholders — § 1361(b)(1)(A).
☐ Family aggregation applied: members of a family (a common ancestor, lineal descendants up to six generations, and their spouses/former spouses) may be counted as one shareholder — § 1361(c)(1).

Eligible Shareholders Only

☐ All shareholders are eligible: individuals (who are U.S. citizens or resident aliens), estates, certain trusts, and certain tax-exempt organizations (§ 401(a) and § 501(c)(3)) — § 1361(b)(1)(B).
☐ No shareholder is a nonresident alien — § 1361(b)(1)(C).
☐ No shareholder is a partnership or a corporation (other than as permitted, e.g., an S corporation owning a QSub).
☐ Any trust shareholder is a permitted trust: grantor trust, testamentary trust (2-year limit), voting trust, Qualified Subchapter S Trust (QSST) (§ 1361(d)), or Electing Small Business Trust (ESBT) (§ 1361(e)).

PART 2 — FEDERAL FORM 2553 (LINE-BY-LINE)

Part I — Election Information

Part I — Shareholders' Consent Statement (columns J–N)

Every shareholder (and, for community/marital property, the shareholder's spouse who holds a community/marital interest) must consent. For each shareholder, complete:

Part II — Selection of Fiscal Tax Year

Complete only if a tax year other than a permitted calendar year is requested. Identify the basis — a natural business year, an ownership tax year, a § 444 election, or a business-purpose request (§ 442 / Rev. Proc. 2006-46).

Part III — Qualified Subchapter S Trust (QSST) Election

Complete only if a QSST will hold stock; the income beneficiary makes the § 1361(d)(2) election here (or by separate statement).

Part IV — Late Corporate Classification / Late S-Election Representations

Complete the representations supporting relief under Rev. Proc. 2013-30 if the election is filed late (see timing rules below).

Timing of the Federal Election (26 U.S.C. § 1362(b))

• General rule: file by the 15th day of the 3rd month of the tax year the election is to take effect (the "2 months and 15 days" rule). For a calendar-year entity electing for 2026, that is on or about March 16, 2026.
• Alternative: file any time during the preceding tax year.
• Newly formed entity: the first tax year begins on the earliest of when it has shareholders, acquires assets, or begins doing business; file within 2 months and 15 days of that date.
• Late filing: if the deadline is missed, relief is available under Rev. Proc. 2013-30 (see Part 4 cross-reference / relief), generally within 3 years and 75 days of the intended effective date.

PART 3 — SHAREHOLDER CONSENT STATEMENT

ALL shareholders must consent to the S election (26 U.S.C. § 1362(a)(2); Treas. Reg. § 1.1362-6). Where stock is community or marital property, the shareholder's spouse must also consent.

PART 4 — ENTITY INTERPLAY (LLCs AND FORM 8832)

• A corporation files only Form 2553 to elect S status.
• An LLC (or other eligible entity) that wants S status may file Form 2553 alone: a timely Form 2553 is treated as a deemed entity classification election (Form 8832) to be taxed as an association/corporation, effective on the requested S-election date — see Form 2553 Instructions and Treas. Reg. § 301.7701-3(c)(1)(v)(C). A separate Form 8832 is therefore generally not required when Form 2553 is timely.
• File a separate Form 8832 only if the entity wants a corporate classification effective on a different date than the S election, or in other circumstances described in the Form 8832 / Form 2553 Instructions.

PART 5 — ALABAMA STATE S-CORP OVERLAY (KEY STATE-SPECIFIC SECTION)

5.1 No Separate Alabama Election — Automatic Recognition

Alabama recognizes the federal S election. Under Ala. Code § 40-18-160, a corporation that is a federal S corporation (and that has not affirmatively elected otherwise where permitted) is treated as an "Alabama S corporation." There is no separate Alabama S-election form to file — the federal election (Form 2553) governs Alabama treatment. The income generally passes through to shareholders and is taxed on their Alabama individual returns (Form 40 / 40NR), not at the corporate level (except for any federal-level corporate tax items the state conforms to, such as built-in gains).

5.2 Alabama Return — Form 20S

The Alabama S corporation files Form 20S (Alabama S Corporation Information/Tax Return) with the Alabama Department of Revenue (ALDOR). The return is due on the same date as the corresponding federal return (generally the 15th day of the 3rd month after year-end; March 15 for calendar-year filers); an automatic extension consistent with the federal extension applies to filing but not to payment.

☐ File Form 20S annually (with Alabama Schedule K and Schedule K-1 equivalents to each shareholder).
☐ Confirm Alabama nexus (factor-presence thresholds under Ala. Code § 40-18-31.2; adjusted periodically).

5.3 Nonresident Shareholders — Composite Return (Form PTE-C) or Schedule NRA

Under Ala. Code § 40-18-176, an Alabama S corporation with one or more nonresident shareholders must address each nonresident's Alabama tax:

• Composite return (Form PTE-C): the S corporation may (and for nonresidents who do not file a consent must) file a composite return and remit tax at 5% on each nonresident shareholder's distributive share of Alabama-source income. Due on the 15th day of the 3rd month after year-end.
• Schedule NRA opt-out: a nonresident shareholder may file a Schedule NRA consent agreement (to file an Alabama return, pay the tax, and submit to Alabama jurisdiction) to elect out of the composite filing. The Schedule NRA is filed with the entity return and remains effective until revoked.

☐ Identify all nonresident shareholders.
☐ For each, obtain a Schedule NRA consent OR include in Form PTE-C composite filing (5%).

5.4 Optional — Alabama Electing Pass-Through Entity (PTE) Tax (Act 2021-1)

For tax years beginning on or after January 1, 2021, an Alabama S corporation may elect to be taxed as an Electing Pass-Through Entity (PTE) — an entity-level Alabama income tax (a federal SALT-cap workaround). Key mechanics (VERIFY current ALDOR guidance/forms):

• How to elect: for tax periods beginning on or after January 1, 2025, check the "Electing PTE" box on a timely filed Form 20S (including extensions). (For earlier periods, the election was made on Form PTE-E via My Alabama Taxes.) The box must be checked each year the election is in effect.
• Approval: by vote of, or written consent of, the entity's governing body and owners/shareholders holding greater than 50% of voting control.
• Return/payment: file Form EPT in addition to Form 20S; the PTE tax is generally computed by applying the 5% rate to the Alabama-apportioned income (lines 1–17 of the Alabama column of Schedule K). Form EPT is due the 15th day of the 3rd month after year-end.
• Estimated tax: required if the Alabama income tax liability is expected to exceed $500 (Ala. Code § 40-18-80.1 mechanics).
• Revocation: check the "Revoking PTE" box on a timely filed Form 20S.

☐ Decide whether to make the Electing PTE election (analyze federal SALT-cap benefit vs. complexity).
☐ Obtain the required governing-body and >50% owner consents.
☐ If electing: check the Electing PTE box on Form 20S and file Form EPT.

5.5 Business Privilege Tax

☐ Confirm the Alabama Business Privilege Tax filing (separate from income tax); verify current minimum/threshold rules with ALDOR.

PART 6 — POST-ELECTION COMPLIANCE

Federal

☐ Reasonable compensation: pay shareholder-employees reasonable W-2 wages for services before taking distributions; the IRS recharacterizes inadequate wages and assesses payroll tax, penalties, and interest. Run payroll, file Forms 941/940, and issue W-2s.
☐ Distributions vs. wages: distributions are generally not subject to FICA, but only after reasonable compensation is paid; track the Accumulated Adjustments Account (AAA) and shareholder basis.
☐ Form 1120-S filed annually; issue Schedule K-1 to each shareholder.
☐ Built-in gains tax (§ 1374): if the entity was formerly a C corporation (or acquired assets with a carryover C-corp basis), a corporate-level tax applies to net recognized built-in gains during the 5-year recognition period.
☐ Excess net passive income tax (§ 1375): if the entity has accumulated C-corp earnings and profits and passive investment income exceeds 25% of gross receipts, a corporate-level tax applies (and, under § 1362(d)(3), three consecutive such years terminate the election).
☐ Single class of stock / eligible shareholders maintained: monitor every transfer; an ineligible shareholder or a second class of stock terminates the election.
☐ Retain the IRS acceptance letter (CP261) permanently.

Alabama

☐ File Form 20S and furnish Alabama K-1s to shareholders.
☐ Handle nonresident shareholders (Form PTE-C composite at 5% or Schedule NRA consents) — Part 5.3.
☐ If elected, file Form EPT and pay/estimate the PTE tax — Part 5.4.
☐ File the Alabama Business Privilege Tax return as required — Part 5.5.
☐ Make required Alabama estimated payments (EFT for payments of $750 or more).

PART 7 — REVOCATION / TERMINATION (26 U.S.C. § 1362(d))

Voluntary Revocation — § 1362(d)(1)

☐ Shareholders holding more than 50% of the shares (voting and nonvoting) on the day of revocation must consent.
☐ File a revocation statement with the IRS Service Center where Form 2553 was filed (no official form; a letter format with shareholder consents).
☐ Effective date: if filed by the 15th day of the 3rd month of the tax year, effective the first day of that year; otherwise the first day of the next tax year (or a specified prospective date).

Involuntary / Automatic Termination — § 1362(d)(2)–(3)

Automatic termination occurs if:
☐ The entity ceases to qualify (exceeds 100 shareholders, issues a second class of stock, or an ineligible shareholder acquires stock) — § 1362(d)(2).
☐ Passive investment income exceeds 25% of gross receipts for 3 consecutive years while the entity has C-corp accumulated E&P — § 1362(d)(3).

Inadvertent Termination Relief — § 1362(f)

☐ If a termination was inadvertent, request IRS relief under § 1362(f) (often via a private letter ruling) to be treated as continuing as an S corporation.

5-Year Re-Election Bar — § 1362(g)

☐ After a termination or revocation, the entity generally may not re-elect S status for 5 tax years without IRS consent.

Alabama on Termination/Revocation

☐ If a federal revocation/termination occurs, the Alabama S status follows the federal status; the entity reverts to C-corporation treatment for Alabama income tax (Form 20C). If an Electing PTE election was in effect, file the Revoking PTE box / coordinate with ALDOR. VERIFY with ALDOR.

SOURCES AND REFERENCES

• IRS Form 2553 and Instructions (Election by a Small Business Corporation).
• IRS Form 8832 and Instructions (Entity Classification Election); Treas. Reg. § 301.7701-3.
• 26 U.S.C. §§ 1361–1368 (Subchapter S); § 1374 (built-in gains); § 1375 (excess net passive income).
• 26 U.S.C. § 1362 (election, revocation, termination); Treas. Reg. § 1.1362-6 (election procedures).
• Rev. Proc. 2013-30 (late S-election relief).
• IRS Form 1120-S and Schedule K-1.
• Ala. Code § 40-18-160 et seq. (Alabama S corporations).
• Ala. Code § 40-18-176 (nonresident shareholder composite returns; 5%); Ala. Admin. Code r. 810-3-176-.01.
• Act 2021-1; Ala. Admin. Code r. 810-3-36-.01 (Electing Pass-Through Entity tax).
• Alabama Form 20S, Form PTE-C, Schedule NRA, Form EPT (ALDOR).
• Alabama Department of Revenue — Pass-Through Entities and Electing Pass-Through Entities guidance, revenue.alabama.gov.