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

S-CORPORATION ELECTION PACKAGE (FORM 2553 + COLORADO 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 Colorado owner should care about the state overlay:

• Colorado recognizes the federal S election automatically — there is no separate Colorado S election. See Part 5.
• The Colorado S corporation files Form DR 0106.
• Colorado offers an optional SALT-cap pass-through entity (PTE) election under the SALT Parity Act, made on Form DR 0106 (or Form DR 1705).

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 — COLORADO STATE S-CORP OVERLAY

Recognition rule — AUTOMATIC (no separate Colorado election)

Colorado automatically recognizes the federal S election. There is no separate Colorado S-corporation election form. Colorado conforms to the federal definition of an S corporation (C.R.S. § 39-22-103(10.5)), so an entity with a valid federal S election is treated as an S corporation for Colorado income tax. Income passes through to shareholders, who report it on their Colorado individual returns (Colorado's flat income tax rate is approximately 4.4% — [verify rate for the applicable tax year]).

Return / form

• The Colorado S corporation files Colorado Form DR 0106 (Colorado Partnership and S Corporation and Composite Nonresident Income Tax Return).
• The entity completes a Colorado K-1 (Form DR 0106K) for each shareholder and files the K-1s with the Department.
• Due date: generally the 15th day of the 4th month after the close of the tax year for pass-through entities — [verify the current Colorado due date and any automatic extension before filing].

Entity-level tax

• Generally no mandatory entity-level Colorado income tax on pass-through income (absent a SALT Parity election); the income flows to shareholders.

Optional SALT-cap pass-through entity (PTE) election — SALT Parity Act (C.R.S. §§ 39-22-340 to 39-22-346)

• The SALT Parity Act lets a partnership or S corporation elect to be taxed at the entity level on its Colorado taxable income, so owners can claim a federal deduction for state tax above the individual $10,000 SALT cap. Enacted by HB 21-1327 and amended by SB 22-124; applies to tax years commencing on or after January 1, 2018.
• The annual election is irrevocable for the tax year once made and is binding on all partners/shareholders (except a C-corporation partner that is unitary with the entity).
• How to elect (tax years 2022 and later): check the SALT Parity Act election box on Form DR 0106, or file the SALT Parity Act Election Form (DR 1705) before filing the return.
• An electing entity must furnish and file Colorado K-1s (DR 0106K) marked with the SALT Parity election; it may not also file a composite return or DR 0107 for the same year.
• Each shareholder claims a corresponding refundable SALT Parity credit on the Colorado individual return and must add back any IRC § 199A deduction.
• [Verify the current statutory sunset date and any rate/mechanics changes with the Colorado DOR before relying on this election.]

Other Colorado items to confirm

☐ Maintain good standing with the Colorado Secretary of State and file the annual Periodic Report.
☐ Register for Colorado wage withholding before paying shareholder-employee wages.
☐ Register for Colorado sales 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 Colorado income tax and FICA, and file Forms 941/940 and Colorado 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 Colorado Form DR 0106 with Colorado K-1s (DR 0106K).
☐ 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.

Colorado effect

Because Colorado follows the federal classification (C.R.S. § 39-22-103(10.5)), a federal revocation/termination ends Colorado S treatment for the same period; the entity then files as a C corporation on Colorado Form DR 0112.

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)
• C.R.S. § 39-22-103(10.5) (Colorado S corporation conformity)
• C.R.S. §§ 39-22-340 to 39-22-346 (SALT Parity Act); HB 21-1327; SB 22-124
• Colorado DOR, Income Tax Topics: SALT Parity Act — https://tax.colorado.gov/income-tax-topics-salt-parity-act
• Colorado DOR, Form DR 0106 / DR 0106K / DR 1705 — https://tax.colorado.gov/DR0106