S-Corporation Election Package (Form 2553 + State S-Election) — District of Columbia

S-CORPORATION ELECTION PACKAGE (FORM 2553 + DISTRICT OF COLUMBIA STATE OVERLAY)

OVERVIEW

This package guides a corporation or eligible LLC through the FEDERAL S-corporation election (IRS Form 2553 under 26 U.S.C. § 1362) and the DISTRICT OF COLUMBIA overlay. An S-corporation passes income, losses, deductions, and credits through to its shareholders, generally avoiding entity-level FEDERAL income tax.

CRITICAL — READ FIRST: The District of Columbia does NOT recognize S-corporation status. DC taxes an S-corporation as a C-corporation under the DC corporation franchise tax (D.C. Code §§ 47-1807, 47-1801.04(16)) at 9.975% on net income (subject to the minimum tax). A federal S-election produces NO District tax benefit — there is double taxation at the DC level (entity franchise tax plus shareholder tax on distributions). See Part 5 before proceeding.

How to use this package. The federal election (Parts 1–4) may still be worthwhile for federal purposes. But evaluate Part 5 carefully — the District overlay frequently changes the cost-benefit analysis for a DC-based entity. Use Parts 6–7 for ongoing compliance and revocation.

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

Every box must be satisfied at all times for the election to be valid. A single failure can terminate S status (see Part 6).

Entity-Level Requirements

☐ The entity is a domestic corporation (or a domestic eligible entity electing corporate treatment — see Part 4)
☐ The entity has no more than 100 shareholders (26 U.S.C. § 1361(b)(1)(A); family members may be treated as one shareholder under § 1361(c)(1))
☐ The entity has only one class of stock (differences in voting rights alone are permitted) (§ 1361(b)(1)(D), (c)(4))
☐ The entity is not an ineligible corporation — not a bank using the reserve method of accounting, not an insurance company taxed under subchapter L, not a § 936 possessions corporation, and not a current/former DISC (§ 1361(b)(2))

Shareholder-Level Requirements (§ 1361(b)(1)(B)–(C))

☐ All shareholders are eligible shareholders only — U.S. citizens or U.S. resident-alien individuals, certain estates, certain trusts, and certain tax-exempt organizations
☐ No shareholder is a nonresident alien
☐ No shareholder is a partnership
☐ No shareholder is a corporation (a parent S-corporation owning a QSub is the limited exception)
☐ Any trust shareholder is a permitted trust only: grantor trust, testamentary trust (2-year limit), voting trust, QSST (§ 1361(d)), or ESBT (§ 1361(e))

PART 2 — FORM 2553 LINE-BY-LINE

Part I — Election Information

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

☐ General deadline: File on or before the 15th day of the 3rd month of the tax year the election is to take effect (for a calendar-year entity electing for 2026, the deadline is March 16, 2026, because March 15 falls on a Sunday — § 7503)
☐ Alternative: File any time during the preceding tax year
☐ Newly formed entity: The 2-month-and-15-day period runs from the activation date — the earliest date the entity has shareholders, acquires assets, or begins doing business

Late-Election Relief — Rev. Proc. 2013-30

If the deadline has passed, relief may be available under Rev. Proc. 2013-30:

☐ The entity intended to be an S-corporation as of the intended effective date
☐ The failure to file timely was due to reasonable cause
☐ The request is filed within 3 years and 75 days of the intended effective date
☐ The entity (and shareholders) reported consistently with S status (or has filed no returns yet)
☐ Write "FILED PURSUANT TO REV. PROC. 2013-30" across the top of Form 2553
☐ Attach a reasonable-cause statement; all shareholders sign under penalties of perjury

Filing Method

☐ Mail or fax to the IRS service center listed in the Form 2553 Instructions (confirm the current DC-area service center/fax)
☐ Electronic filing of Form 2553 is not available as a standalone filing
☐ Retain proof of mailing/fax confirmation; expect IRS acceptance letter CP261 within ~60 days

PART 3 — SHAREHOLDER CONSENT STATEMENT (FORM 2553, PART I, COLUMN K)

ALL shareholders must consent. Each shareholder (and each spouse with a community-property interest in the stock) signs below. Consent is binding.

Officer execution: Under penalties of perjury, I declare the corporation has elected S status and that the statements herein are true, correct, and complete.

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

PART 4 — ENTITY INTERPLAY (LLC / CORPORATION)

An LLC may elect S status without first filing Form 8832. Under Treas. Reg. § 301.7701-3(c)(1)(v)(C), a domestic eligible entity (e.g., an LLC) that is eligible for S status and timely files Form 2553 is deemed to have elected corporate classification — no separate Form 8832 is required. File only Form 2553, and make sure its effective date satisfies both the Form 8832 timing rule (not more than 75 days before, nor 12 months after, filing) and the § 1362(b) S-election deadline.

DC caution: Because DC does not recognize S status, a DC LLC's choice of federal classification has unusual DC consequences. An LLC taxed as a corporation (including a federal S-corp) is generally subject to the DC corporation franchise tax; an LLC classified as a partnership/disregarded is generally subject to the DC unincorporated business franchise tax. Model both before filing Form 2553. See Part 5.

☐ Existing C-corporation electing S status — file Form 2553 only; watch built-in gains exposure (Part 6)
☐ LLC electing S status — file Form 2553 only (deemed 8832); confirm operating agreement does not create a prohibited second class of "stock"
☐ Newly formed corporation — file Form 2553 within 2 months 15 days of the activation date
☐ 60-month rule: after changing classification, the entity generally cannot change again for 60 months without IRS consent (Treas. Reg. § 301.7701-3(c)(1)(iv))

PART 5 — DISTRICT OF COLUMBIA STATE S-CORP OVERLAY

CRITICAL: The District of Columbia does NOT recognize the federal S-corporation election. There is no DC S-election; the federal election gives the entity no District-level pass-through benefit.

DC Taxes an S-Corporation as a C-Corporation

☐ DC subjects an S-corporation to the DC corporation franchise tax in the same manner as a C-corporation (D.C. Code §§ 47-1807.02, 47-1801.04(16))
☐ The franchise tax is based on the S-corporation's net income and imposed at 9.975%
☐ A minimum tax applies even at low/zero income (commonly $250 where DC gross receipts are $1 million or less; $1,000 where gross receipts exceed $1 million — confirm current figures)
☐ The entity files DC Form D-20 (Corporation Franchise Tax Return)
☐ Result: economic double taxation at the DC level — the entity pays the franchise tax, and shareholders are taxed on distributions/income on their DC personal returns; the federal S benefit does not carry over

Unincorporated Business Franchise Tax (for non-corporate entities)

☐ Entities that are not corporations for DC purposes (e.g., LLCs taxed as partnerships, general/limited partnerships) with DC gross income over $12,000 are subject to the unincorporated business franchise tax at 9.975% (D.C. Code §§ 47-1808 et seq.), filed on DC Form D-30
☐ This is relevant when comparing a DC LLC's classification options (see Part 4) — note the long-standing DC exemption for certain professional service businesses where more than 80% of gross income is from personal services and capital is not a material income-producing factor (confirm current scope)

DC Returns and Filings

Planning consequence: For a DC-domiciled or DC-doing-business entity, the federal S-election should be evaluated for federal benefits (self-employment-tax planning, pass-through at the federal level) only — there is no DC pass-through relief, and the DC franchise tax applies regardless.

PART 6 — POST-ELECTION COMPLIANCE

Reasonable Compensation

☐ Shareholder-employees must receive reasonable compensation (W-2 wages) for services before taking distributions; the IRS recharacterizes inadequate wages as wages subject to employment tax
☐ Document the basis for the compensation figure (comparable wages, duties, time devoted)

Built-In Gains Tax — 26 U.S.C. § 1374

☐ Applies when a former C-corporation elects S status and disposes of appreciated assets held at conversion within the 5-year recognition period
☐ Tax is imposed at the federal entity level at the highest corporate rate on the recognized built-in gain
☐ DC: the entity already pays the DC franchise tax as a C-corp, so the § 1374 federal regime overlaps differently — model carefully

Excess Net Passive Income Tax — 26 U.S.C. § 1375

☐ Applies if the S-corporation has accumulated C-corporation E&P AND passive investment income exceeds 25% of gross receipts
☐ Federal entity-level tax at the highest corporate rate on excess net passive income
☐ Termination trap: if both conditions persist for 3 consecutive years, S status terminates under § 1362(d)(3)

Ongoing Federal/DC Filings

☐ File federal Form 1120-S annually; issue Schedule K-1 to each shareholder
☐ File DC Form D-20 (franchise tax) annually and pay the franchise/minimum tax — regardless of S status
☐ Maintain single class of stock and shareholder eligibility at all times (for the federal election)
☐ Retain the IRS CP261 acceptance notice permanently

PART 7 — REVOCATION (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 service center (no official form); state the effective date
☐ Timing: if filed on or before the 15th day of the 3rd month of the tax year, the revocation is effective for that entire year; otherwise it takes effect the following tax year (a prospective date may be specified)
☐ Attach the consent of the requisite shareholders
☐ DC is unaffected by federal revocation — the entity continues to be taxed under the DC franchise tax either way

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

☐ Entity ceases to qualify (e.g., >100 shareholders, second class of stock, ineligible shareholder acquires stock) — terminates on the date of the disqualifying event
☐ Passive income termination — excess net passive income > 25% of gross receipts with C-corp E&P for 3 consecutive years
☐ Five-year wait: after termination/revocation, a new S-election generally requires waiting 5 tax years absent IRS consent (§ 1362(g))

FILLABLE FIELDS SUMMARY

• Entity name: [________________________________]
• EIN: [________________________________]
• State of incorporation: District of Columbia
• Date incorporated / organized: [__/__/____]
• Federal election effective date: [__/__/____]
• Selected tax year end: [__/__]
• Number of shareholders: [____]
• Contact officer / title: [________________________________] / [________________________________]
• DC franchise tax acknowledged (S status NOT recognized in DC): ☐ Yes
• DC OTR account / Notice (D-20 / D-30): [________________________________]
• Preparer / advisor: [________________________________]
• Date package completed: [__/__/____]

SOURCES AND REFERENCES

• 26 U.S.C. §§ 1361–1362 (S-corporation definition, election, revocation, termination)
• 26 U.S.C. §§ 1374, 1375 (built-in gains; excess net passive income)
• Treas. Reg. § 301.7701-3(c)(1)(v)(C) (LLC deemed corporate election via Form 2553)
• IRS Form 2553 and Instructions; IRS S-Corporations overview (irs.gov)
• Rev. Proc. 2013-30 (late S-election relief)
• D.C. Code § 47-1801.04 (general definitions — corporation; § 47-1801.04(16))
• D.C. Code § 47-1807 et seq. (corporation franchise tax — 9.975%; DC does not recognize S status)
• D.C. Code § 47-1808 et seq. (unincorporated business franchise tax — D-30)
• DC Office of Tax and Revenue, Form D-20 (Corporation Franchise Tax) and Form D-30 (Unincorporated Business Franchise Tax) and instructions