S-Corporation Election Package (Form 2553 + Illinois S-Election)

S-CORPORATION ELECTION PACKAGE — ILLINOIS

OVERVIEW

This package guides an Illinois corporation (or an Illinois LLC electing corporate treatment) through electing federal S-corporation status on IRS Form 2553 and satisfying the Illinois state overlay. An S election causes income, losses, deductions, and credits to pass through to shareholders, avoiding entity-level federal income tax under Subchapter S (26 U.S.C. §§ 1361–1379).

Illinois in one line: Illinois conforms to the federal S election — no separate state election — and the S corporation files Form IL-1120-ST. CRITICAL: Illinois imposes the 1.5% Personal Property Replacement Tax (PPRT) on S-corporation net income at the entity level (35 ILCS 5/201(c)–(d)), even though S corporations do not pay the 7% Illinois corporate income tax. An optional 4.95% PTE tax is available under 35 ILCS 5/201(p).

Package Contents

1. Part 1 — Federal Eligibility Checklist (IRC § 1361)
2. Part 2 — Form 2553 Line-by-Line Guide
3. Part 3 — Shareholder Consent Statement
4. Part 4 — Entity Interplay (LLC / Form 8832)
5. Part 5 — Illinois State Overlay
6. Part 6 — Post-Election Compliance
7. Part 7 — Revocation
8. Fillable Field Summary
9. Sources & References

PART 1 — FEDERAL ELIGIBILITY CHECKLIST (IRC § 1361)

An entity may elect S status only if every requirement below is satisfied on the effective date and continuously thereafter. A single violation terminates the election (26 U.S.C. § 1362(d)(2)).

Entity Requirements — 26 U.S.C. § 1361(b)(1)

☐ The entity is a domestic corporation or a domestic eligible entity (LLC) that will be treated as a corporation
☐ The entity has no more than 100 shareholders (family members may be counted as one — § 1361(c)(1))
☐ The entity has only one class of stock (differences in voting rights alone are permitted — § 1361(c)(4))
☐ The entity is not an ineligible corporation (no financial institution using the § 585 reserve method; no insurance company under Subchapter L; no § 936 possessions-credit corporation; no current/former DISC)

Shareholder Requirements — 26 U.S.C. § 1361(b)(1)(B)–(C)

☐ All shareholders are eligible: individuals, estates, certain trusts, or qualifying tax-exempt organizations
☐ No shareholder is a partnership, a corporation, or a nonresident alien (§ 1361(b)(1)(B)–(C))
☐ Any trust shareholder is a permitted type only: grantor trust, testamentary trust (2-year limit), voting trust, QSST, or ESBT (§ 1361(c)(2), (d), (e))
☐ Each shareholder's consent is documented (all shareholders must consent — § 1362(a)(2))

PART 2 — IRS FORM 2553 LINE-BY-LINE GUIDE

Timing — 26 U.S.C. § 1362(b)

☐ Standard deadline: file no later than 2 months and 15 days after the beginning of the tax year the election is to take effect (i.e., by the 15th day of the 3rd month)
☐ Alternative: file at any time during the tax year preceding the year the election is to take effect
☐ New entity: the 2-month-and-15-day clock starts on the earliest of (a) first issuance of stock, (b) first having assets, or (c) first doing business

Part I — Election Information

Part II — Fiscal Tax Year (if a non-calendar year is requested)

☐ Complete Part II only if Box F selects a fiscal year — state the business-purpose or § 444 basis
☐ Most S corporations adopt a calendar year; a § 444 election may require a required payment (Form 8752)

Late Election Relief — Rev. Proc. 2013-30

If the deadline has passed, relief may be available when 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
☐ The entity intended to be an S corporation as of the intended effective date
☐ Failure to qualify was solely because Form 2553 was not timely filed
☐ Reasonable cause statement attached, signed under penalties of perjury
☐ All required returns are consistent with S status (or none were due)
☐ All shareholders from the effective date forward report consistently with S status

PART 3 — SHAREHOLDER CONSENT STATEMENT

Under 26 U.S.C. § 1362(a)(2), all shareholders on the day of the election must consent. The consent is incorporated in column K of Form 2553; the table below documents it.

Consent language: Each shareholder, by signing above, consents to the corporation's election under 26 U.S.C. § 1362(a) to be treated as an S corporation and represents that the information stated is true and correct.

Community property note: in a community-property context, the consenting spouse who has a community interest in the stock must also consent (Treas. Reg. § 1.1362-6(b)(2)). Illinois is not a community-property state; this generally affects only shareholders who hold the stock as community property under another state's law.

PART 4 — ENTITY INTERPLAY (LLC / FORM 8832)

☐ Corporation electing S status: a domestic corporation files only Form 2553 — no Form 8832 is required
☐ LLC electing S status: an LLC that has not elected corporate treatment may file Form 2553 alone; a timely, valid Form 2553 is treated as a deemed entity-classification election (Form 8832) to be taxed as a corporation, effective the same date (Treas. Reg. § 301.7701-3(c)(1)(v)(C))
☐ LLC already taxed as a C corporation (prior Form 8832): file Form 2553 only
☐ Confirm the Illinois LLC is in good standing with the Illinois Secretary of State before filing
☐ Confirm the entity's governing documents (operating agreement / bylaws) do not create a prohibited second class of stock (e.g., disproportionate distribution/liquidation rights)

PART 5 — ILLINOIS STATE OVERLAY (KEY SECTION)

S-Corp Recognition

☐ Illinois conforms to the federal S election — there is NO separate Illinois S election. A corporation that is a small business corporation under IRC § 1361(a) and is required to file U.S. Form 1120-S (or has Illinois net income/loss) files Form IL-1120-ST.
☐ Retain the IRS acceptance letter (CP261).

Return Form

☐ File Illinois Form IL-1120-ST — Small Business Corporation Replacement Tax Return annually (and provide each shareholder a Schedule K-1-P)
☐ Due March 15 for calendar-year filers (15th day of the 3rd month after year-end). An extension to file is not an extension to pay — replacement tax is due by the original date and interest accrues from that date.

CRITICAL — 1.5% Personal Property Replacement Tax (PPRT) — FLAG

☐ Illinois imposes a 1.5% Personal Property Replacement Tax (PPRT) on S-corporation net income AT THE ENTITY LEVEL under 35 ILCS 5/201(c)–(d). This is an entity-level Illinois tax that most other states do not impose on S corporations.
☐ S corporations are NOT subject to the 7% Illinois corporate income tax — the entity pays only the 1.5% PPRT; the income itself still passes through and is taxed to shareholders at the individual rate (currently 4.95%) on their Illinois returns
☐ The PPRT starts from federal taxable income with Illinois additions/subtractions ("base income"); if the S corporation has no Illinois net income in a year, no PPRT is due
☐ For multistate S corporations, only the Illinois-apportioned share (single-sales-factor, market-based sourcing for services) is subject to PPRT
☐ The PPRT is deductible at the entity level for federal purposes, reducing pass-through income
☐ Plan for it: owners who ignore the 1.5% PPRT when planning distributions can face a year-end cash shortfall — the entity must fund the tax (estimated payments may apply)

Optional — Pass-Through Entity (PTE) Tax — 35 ILCS 5/201(p)

☐ Effective for tax years ending on or after December 31, 2021, an S corporation may elect to pay an entity-level PTE tax equal to 4.95% of net income — a SALT-cap workaround (deductible federally)
☐ Each shareholder of an electing entity receives a credit against Illinois income tax equal to 4.95% of the shareholder's distributive share of the electing entity's net income
☐ The PTE tax is in addition to (not in lieu of) the 1.5% PPRT — both can apply to an electing S corporation
☐ The election is annual; evaluate with a tax advisor each year

Nonresident Shareholders

☐ Illinois requires pass-through entity withholding for nonresident shareholders on their share of Illinois-source income (35 ILCS 5/709.5), unless an exemption certificate (Form IL-1000-E) is on file or the PTE election covers the liability

Illinois Entity-Level Tax — Summary

PART 6 — POST-ELECTION COMPLIANCE

IRS Confirmation

☐ Expect IRS acceptance notice CP261 (or denial) within ~60 days; if none, call IRS Business & Specialty Tax Line (800) 829-4933
☐ Retain the CP261 permanently with corporate records

Reasonable Compensation

☐ Pay shareholder-employees reasonable compensation as W-2 wages before non-wage distributions (IRS scrutinizes under-compensation that recharacterizes wages as distributions to avoid FICA)
☐ Document the basis for compensation (duties, time, comparable salaries)

Built-In Gains Tax — 26 U.S.C. § 1374

☐ If the corporation converted from C to S, a corporate-level built-in gains (BIG) tax applies to net recognized built-in gain on appreciated assets disposed of during the 5-year recognition period; track each asset's basis and fair market value as of the conversion date

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

☐ If the corporation has accumulated C-corporation E&P and passive investment income exceeds 25% of gross receipts, a corporate-level tax applies; if this persists for 3 consecutive years, the S election terminates under § 1362(d)(3)

Ongoing Filings

☐ File federal Form 1120-S and issue Schedule K-1 to each shareholder annually
☐ File Illinois Form IL-1120-ST and Schedule K-1-P annually; pay the 1.5% PPRT (and PTE tax if elected); make estimated payments as required
☐ Maintain pass-through withholding (or Form IL-1000-E exemptions) for nonresident shareholders
☐ Maintain a single class of stock and continuous shareholder eligibility

PART 7 — REVOCATION (26 U.S.C. § 1362(d)(1))

☐ Voluntary revocation requires consent of shareholders holding more than 50% of the issued and outstanding shares (voting and nonvoting) on the date of revocation
☐ File a revocation statement with the IRS service center where Form 2553 was filed (no official form; use a statement that the corporation revokes its § 1362(a) election, listing the EIN, number of shares outstanding, and the intended effective date)
☐ Attach a statement of consent signed by the consenting shareholders
☐ Effective date: if filed on or before the 15th day of the 3rd month of the tax year, effective the first day of that year; otherwise effective the first day of the following tax year (a prospective date may also be specified)
☐ After revocation/termination, a 5-year waiting period applies before re-electing without IRS consent (§ 1362(g))
☐ Illinois status follows the federal treatment; notify the Illinois Department of Revenue and resume filing the Illinois C-corporation return (Form IL-1120). Note: the 1.5% PPRT still applies to a C corporation (plus the 2.5% corporate PPRT and 7% income tax) — confirm the post-revocation Illinois tax profile with a tax advisor

FILLABLE FIELD SUMMARY

SOURCES & REFERENCES

• 26 U.S.C. §§ 1361–1379 (Subchapter S)
• 26 U.S.C. § 1362 (election, revocation, termination); § 1374 (built-in gains); § 1375 (excess net passive income)
• IRS Form 2553 and Instructions (Rev. 12/2020 or later); IRS Form 8832 (entity classification)
• Treas. Reg. § 301.7701-3(c)(1)(v)(C) (deemed Form 8832 from a timely Form 2553); Treas. Reg. § 1.1362-6 (election procedures)
• Rev. Proc. 2013-30 (late election relief)
• 35 ILCS 5/201(c)–(d) (Personal Property Replacement Tax — 1.5% on S corporations); 35 ILCS 5/201(p) (PTE tax election — 4.95%); 35 ILCS 5/502, 5/709.5 (pass-through returns / nonresident withholding)
• Illinois Department of Revenue — Pub-129 (Pass-through Entity Information); Subchapter S (Small Business) Corporation guidance; Form IL-1120-ST (Small Business Corporation Replacement Tax Return); Schedule K-1-P; Form IL-1000-E