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

S-CORPORATION ELECTION PACKAGE (FORM 2553 + CALIFORNIA 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 a California owner MUST read the state overlay first — California is NOT a pure pass-through state:

• California recognizes the federal S election automatically — there is no separate California S election. See Part 5.
• BUT California imposes an entity-level tax on S corporations: the GREATER of 1.5% of net income OR the $800 minimum franchise tax (Cal. Rev. & Tax. Code §§ 23802, 23153). This materially reduces the benefit of S status in California. See the FLAG in Part 5.
• The California S corporation files Form 100S.

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.
• California note: an LLC taxed as an S corporation is treated and taxed as a corporation for California purposes (files Form 100S and is subject to the franchise tax in Part 5), not as an LLC paying the LLC annual tax/fee.

PART 5 — CALIFORNIA STATE S-CORP OVERLAY

Recognition rule — AUTOMATIC (no separate California election)

California automatically recognizes the federal S election under Cal. Rev. & Tax. Code § 23800 et seq. When a corporation elects federal S status by filing Form 2553, it automatically becomes an S corporation for California; there is no separate California S-corporation election. (To revoke California S treatment, see Part 7 — it follows the federal revocation.)

>>> FLAG: CALIFORNIA TAXES S CORPORATIONS AT THE ENTITY LEVEL <<<

California does NOT fully follow federal pass-through treatment. A California S corporation pays an entity-level tax equal to the GREATER of:

• 1.5% of the S corporation's California net income (Cal. Rev. & Tax. Code § 23802(b)), OR
• the $800 minimum franchise tax (Cal. Rev. & Tax. Code § 23153).

Examples: net income of $100,000 → tax of $1,500 (1.5%). Net income of $50,000 → $800 (the minimum applies because 1.5% would be only $750). A loss year → $800 minimum still due.

• The $800 minimum is owed even if the corporation is inactive, operates at a loss, or files a short-period return. It is waived for the first taxable year of a newly formed/qualified corporation (the 1.5% on first-year net income still applies). It is also waived if the corporation did no California business and the tax year was 15 days or fewer.
• This entity-level tax is in addition to the California personal income tax that shareholders pay on their pass-through share.

Return / form

• The California S corporation files FTB Form 100S (California S Corporation Franchise or Income Tax Return) if it is incorporated in California, doing business in California, registered with the California Secretary of State, or receiving California-source income.
• Due date: the 15th day of the 3rd month after the close of the tax year (March 15 for calendar-year filers).
• Estimated tax payments are required; the $800 minimum is generally due in the first quarter of the tax year. Apportion multistate income using Schedule R.

Optional pass-through entity (PTE) elective tax

• California has an elective PTE tax (a federal SALT-cap workaround) under AB 150 / SB 113 (Rev. & Tax. Code §§ 17052.10, 19900–19906) — generally 9.3% on qualified net income of consenting owners, with a corresponding owner credit. This is separate from and on top of the 1.5% franchise tax. [Verify current sunset, rate, and election/payment deadlines (June 15 prepayment) before relying on it.]

Other California items to confirm

☐ Maintain good standing with the California Secretary of State and file the periodic Statement of Information (Form SI-550).
☐ Register with the EDD for payroll-tax accounts before paying shareholder-employee wages.
☐ Register with CDTFA for sales/use tax if selling taxable goods.

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 California income tax and FICA, file Forms 941/940, and file California EDD returns (DE 9 / DE 9C).
☐ 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 (California computes its own built-in gains tax).
☐ 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 California Form 100S with California K-1s (Schedule K-1 (100S)); pay the greater of 1.5% / $800.
☐ 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.

California effect

California S treatment follows the federal classification (Rev. & Tax. Code § 23800 et seq.). A federal revocation/termination ends California S treatment for the same period; the entity then files as a C corporation on California Form 100 (and the C-corporation franchise tax rate, currently 8.84%, replaces the 1.5% S-corp rate). The $800 minimum franchise tax continues to apply.

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)
• Cal. Rev. & Tax. Code § 23800 et seq. (S corporations conformed); § 23802 (1.5% rate); § 23153 (minimum franchise tax)
• California FTB, S corporations — https://www.ftb.ca.gov/file/business/types/corporations/s-corporations.html
• California FTB, Form 100S and Booklet — https://www.ftb.ca.gov/forms/
• California Tax Service Center, S Corporations — https://taxes.ca.gov/s-corporations/