S-Corporation Election Package (Form 2553 + State S-Election) — Arkansas

S-CORPORATION ELECTION PACKAGE (FORM 2553 + ARKANSAS STATE OVERLAY)

OVERVIEW

An S corporation is not a separate kind of entity. It is a federal tax classification, under Subchapter S of the Internal Revenue Code, available to a qualifying corporation or LLC that timely files IRS Form 2553. When the election is in effect, the entity generally pays no federal income tax; instead, items of income, loss, deduction, and credit pass through to the shareholders, who report them on their personal returns. This avoids the "double taxation" of a C corporation.

Why elect S status:

• Pass-through taxation — no entity-level federal income tax (26 U.S.C. § 1363).
• Potential self-employment / payroll tax savings: only a shareholder-employee's reasonable compensation (W-2 wages) is subject to FICA; distributions beyond reasonable compensation are not.
• Limited liability of the underlying corporation or LLC is retained.

Why an Arkansas owner should care about the state overlay:

• Arkansas no longer requires a separate state S election for tax years beginning on or after January 1, 2018 — the former Form AR1103 is retired, and the federal S election is deemed made for Arkansas under Ark. Code Ann. § 26-51-409(b). See Part 5.
• The Arkansas S corporation files Form AR1100S.
• A federal S corporation may not elect to be treated as a C corporation for Arkansas purposes.

Entity / filing fields (complete before filing):

PART 1 — FEDERAL ELIGIBILITY CHECKLIST (IRC § 1361)

Confirm EVERY item below before filing Form 2553. A single failure makes the entity ineligible and any election invalid.

Entity-level requirements

☐ The entity is a domestic corporation or an eligible domestic entity (e.g., an LLC) electing to be treated as a corporation (26 U.S.C. § 1361(b)(1)).
☐ The entity has no more than 100 shareholders (§ 1361(b)(1)(A)). Members of a family (a common ancestor, lineal descendants, and their spouses/former spouses) may be counted as one shareholder under § 1361(c)(1).
☐ The entity has only ONE class of stock (§ 1361(b)(1)(D)). Differences in voting rights alone are permitted; differences in distribution or liquidation rights are not.
☐ The entity is not an ineligible corporation under § 1361(b)(2) (e.g., a financial institution using the reserve method of accounting for bad debts, an insurance company taxed under subchapter L, a possessions-tax-credit corporation, or a current/former DISC).

Shareholder eligibility (§ 1361(b)(1)(B)–(C))

☐ Every shareholder is an eligible shareholder: an individual (U.S. citizen or resident), an estate, a qualifying trust, or a § 401(a) / § 501(c)(3) tax-exempt organization.
☐ No shareholder is a nonresident alien (§ 1361(b)(1)(C)).
☐ No shareholder is a partnership or a corporation.
☐ Any trust shareholder is a permitted trust: a grantor trust, a former-grantor trust (2-year window), a testamentary trust (2-year window), a voting trust, a Qualified Subchapter S Trust (QSST) (§ 1361(d)), or an Electing Small Business Trust (ESBT) (§ 1361(e)).

PART 2 — FEDERAL FORM 2553, LINE BY LINE

Part I — Election Information

Part II — Selection of Fiscal Tax Year

Complete only if the entity wants a tax year other than the required year (generally the calendar year). State the business-purpose basis (e.g., § 444 election, natural business year under Rev. Proc. 2006-46, or ownership tax year).

Part III — QSST Election

A Qualified Subchapter S Trust beneficiary uses Part III (or a separate statement under § 1361(d)(2)) to elect QSST treatment so the trust qualifies as an eligible shareholder.

Part IV — Late Corporate Classification Election Representations

Used when the entity also seeks late S-election relief (and, for an LLC, a deemed entity classification election). See timing and relief below.

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

• Timely election: file by the 15th day of the 3rd month of the tax year the election is to take effect, or at any time during the immediately preceding tax year.
• New entities: the first tax year begins on the earliest of when the corporation has shareholders, acquires assets, or begins doing business; file within 2 months and 15 days of that date.
• Late-election relief — Rev. Proc. 2013-30: if the deadline is missed, relief is generally available if (1) the entity intended to be an S corp as of the intended effective date, (2) the only reason it is not an S corp is the missed/defective filing, (3) there is reasonable cause and the entity acted diligently, and (4) the relief request is filed within 3 years and 75 days of the intended effective date. Write "FILED PURSUANT TO REV. PROC. 2013-30" across the top of Form 2553 and attach a reasonable-cause statement signed by all shareholders.

Filing method

Form 2553 is filed by mail or fax to the IRS service center designated in the current instructions for the entity's state. Electronic filing of a standalone Form 2553 is not generally available; it may be attached to a timely filed Form 1120-S for certain late elections. Retain the IRS acceptance notice (CP261) permanently.

PART 3 — SHAREHOLDER CONSENT STATEMENT (ALL SHAREHOLDERS MUST CONSENT)

Every shareholder on the effective date (and, for a preceding-year election, those who held stock during that prior period) must consent. Reproduce and attach extra rows as needed.

By signing, each shareholder consents to the S corporation election under 26 U.S.C. § 1362(a) and represents that the information provided is true and correct.

PART 4 — ENTITY INTERPLAY (LLC ELECTING S STATUS)

An LLC is, by default, a disregarded entity (single member) or a partnership (multi-member). To be taxed as an S corporation it must first be classified as an association taxable as a corporation.

• A single Form 2553, filed on time, lets an eligible LLC elect S status without separately filing Form 8832 (Entity Classification Election). A timely, properly completed Form 2553 is treated as a deemed Form 8832 corporate-classification election effective on the same date (Treas. Reg. § 301.7701-3(c)(1)(v)(C)).
• If the LLC wants corporate (C) classification effective on a different date than the S election, file Form 8832 separately.
• Confirm the LLC operating agreement does not create a second class of stock (e.g., disproportionate distribution/liquidation rights or preferred returns), which would void S eligibility.

PART 5 — ARKANSAS STATE S-CORP OVERLAY

Recognition rule — AUTOMATIC (no separate Arkansas election as of TY 2018)

Historically, Arkansas required a separate state S election on Form AR1103 (filed in duplicate within the first 75 days of the first tax year, with all shareholder consents and a copy of the IRS S-corp acceptance attached). That separate-election requirement no longer applies. For tax years beginning on or after January 1, 2018 (Act 2017, No. 434), Ark. Code Ann. § 26-51-409 provides:

• § 26-51-409(b)(1): a corporation is treated as a Subchapter S corporation for Arkansas income tax purposes if it has elected Subchapter S treatment for federal income tax purposes for the same tax year; and an election made for federal income tax purposes is deemed to have been made for Arkansas income tax purposes.
• § 26-51-409(b)(2): a federal S corporation may not elect to be treated as a Subchapter C corporation for Arkansas.
• § 26-51-409(b)(3): the Arkansas Subchapter S return must have a complete copy of the federal Subchapter S return attached.

Return / form

• The Arkansas S corporation files Form AR1100S (Subchapter S Corporation Income Tax Return), with a complete copy of the federal Form 1120-S attached (§ 26-51-409(b)(3)).
• Due date: generally the 15th day of the 3rd month after the close of the tax year (March 15 for calendar-year filers); extensions available (Form AR1055).

Entity-level tax / franchise tax

• Generally no entity-level Arkansas income tax on pass-through income; shareholders pay Arkansas individual income tax on their pro rata share (top rate approximately 3.9% for recent years — [verify rate for the applicable tax year]).
• Nonresident shareholders receiving a prorated share of income must file an Arkansas income tax return and remit the applicable tax; failure by a nonresident shareholder is grounds for the Secretary to revoke the corporation's Arkansas Subchapter S election and collect the tax from the corporation (§ 26-51-409(c)).
• The corporation must still pay the Arkansas annual franchise tax (minimum $150, due May 1) to the Secretary of State — [verify amount for the applicable year].
• Arkansas offers an optional Pass-Through Entity (PET) / entity-level tax election as a SALT-cap workaround — [verify current form, rate, and election mechanics with Arkansas DFA before relying on it].

Other Arkansas items to confirm

☐ Maintain a registered agent with a physical Arkansas street address (Ark. Code Ann. § 4-20-105).
☐ File the Annual Corporation Franchise Tax Report with the Arkansas Secretary of State.
☐ Register for Arkansas withholding and pass-through withholding (Form AR941PT) for nonresident members where applicable.

PART 6 — POST-ELECTION COMPLIANCE

☐ Reasonable compensation. A shareholder who performs services must be paid reasonable compensation as W-2 wages before taking distributions; the IRS may recharacterize disguised wages and assess back FICA, penalties, and interest.
☐ Payroll setup. Run payroll, withhold and deposit federal and Arkansas income tax and FICA, and file Forms 941/940 and Arkansas withholding returns.
☐ Distributions. Distributions to shareholders are generally tax-free to the extent of stock basis and the accumulated adjustments account (AAA); track basis carefully (§ 1367).
☐ Built-in gains tax (§ 1374). If the entity converted from C-corporation status, gain on pre-conversion appreciated assets sold within the 5-year recognition period is taxed at the entity level.
☐ Passive investment income (§ 1375). If the entity has accumulated C-corporation earnings and profits and passive investment income exceeds 25% of gross receipts, an entity-level tax applies; exceeding 25% for 3 consecutive years terminates the S election (§ 1362(d)(3)).
☐ One class of stock maintained. Avoid side agreements, disproportionate distributions, or debt that could be reclassified as a second class of stock.
☐ Annual federal/state returns. File Form 1120-S with Schedules K-1 federally and Arkansas Form AR1100S (with the federal return attached) and Arkansas K-1s.
☐ Recordkeeping. Retain Form 2553, the CP261 acceptance notice, shareholder consents, stock/ownership records, and minutes permanently.

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

Voluntary revocation (§ 1362(d)(1))

☐ Shareholders holding more than 50% of the outstanding shares (voting and nonvoting) must consent.
☐ File a revocation statement with the IRS (no official form; a signed letter identifying the entity, EIN, and effective date, with shareholder consents).
☐ Effective date: if filed by the 15th day of the 3rd month of the tax year, it is effective the first day of that year; otherwise the first day of the following tax year. A prospective date may be specified.

Automatic termination (§ 1362(d)(2)–(3))

Termination is automatic if:
☐ The entity ceases to qualify as a small business corporation (e.g., exceeds 100 shareholders, an ineligible shareholder acquires stock, or a second class of stock is created) — effective on the date of the disqualifying event.
☐ The entity has C-corporation E&P and passive investment income exceeds 25% of gross receipts for 3 consecutive tax years — terminating at the start of the next year.

Five-year re-election bar (§ 1362(g))

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

Arkansas effect

Because Arkansas follows the federal classification (§ 26-51-409(b)), a federal revocation/termination ends Arkansas S treatment for the same period; the entity then files as a C corporation on Arkansas Form AR1100CT. Note also that under § 26-51-409(c) the Secretary may revoke the Arkansas election if a nonresident shareholder fails to report and remit Arkansas tax.

SIGNATURE BLOCK

Authorized Officer

Signature: _________________________________________
Name: [________________________________]
Title: [________________________________]
Date: [__/__/____]

SOURCES AND REFERENCES

• 26 U.S.C. §§ 1361–1368, 1374, 1375 (Subchapter S)
• 26 U.S.C. § 1362 (election, revocation, termination)
• IRS Form 2553 and Instructions; IRS Notice CP261
• Rev. Proc. 2013-30 (late election relief); Treas. Reg. § 1.1362-6; Treas. Reg. § 301.7701-3 (entity classification)
• Ark. Code Ann. § 26-51-409 (Federal Subchapter S adopted; deemed Arkansas election) — https://law.justia.com/codes/arkansas/title-26/subtitle-5/chapter-51/subchapter-4/section-26-51-409/
• Arkansas DFA, Subchapter S Corporation Income Tax Instructions; Form AR1100S — https://www.dfa.arkansas.gov/income-tax/
• Arkansas Secretary of State, Franchise Tax — https://www.sos.arkansas.gov/business-commercial-services-bcs/franchise-tax