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

S-CORPORATION ELECTION PACKAGE (FORM 2553 + STATE S-ELECTION) — KENTUCKY

OVERVIEW

An S-corporation election lets a qualifying corporation (or an LLC that elects corporate treatment) pass income, losses, deductions, and credits through to its shareholders, avoiding entity-level federal income tax under Subchapter S (26 U.S.C. §§ 1361–1379). The election is made by filing IRS Form 2553 under 26 U.S.C. § 1362(a).

This package walks through:

• Part 1 — Federal eligibility checklist (IRC § 1361)
• Part 2 — Form 2553 line-by-line and timing rules
• Part 3 — Shareholder consent statement
• Part 4 — Entity interplay (LLCs, deemed corporate election)
• Part 5 — Kentucky state S-corporation overlay
• Part 6 — Post-election compliance
• Part 7 — Revocation

Kentucky in one line: Kentucky automatically recognizes the federal S election — there is no separate Kentucky S-election form. The S corporation files Form 720S (the current return is titled Form PTE, Pass-Through Entity Income and LLET Return). CRITICAL: Kentucky imposes the Limited Liability Entity Tax (LLET) on S corporations — a minimum of $175 per year even when no income tax is due (KRS § 141.0401).

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

Confirm every item below before filing. A single failed requirement makes the corporation an "ineligible corporation" and voids the election.

Entity-Level Requirements (§ 1361(b)(1))

☐ The entity is a domestic corporation (or an LLC/eligible entity electing to be taxed as a corporation — see Part 4)
☐ The entity has no more than 100 shareholders (§ 1361(b)(1)(A); family members may be treated 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
☐ The entity is not an ineligible corporation under § 1361(b)(2) (e.g., a bank using the reserve method of accounting, an insurance company taxed under subchapter L, a § 936 possessions-credit corporation, or a DISC)

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

☐ Every shareholder is an individual, estate, eligible trust, or exempt organization — no partnerships, no C corporations, no nonresident aliens (§ 1361(b)(1)(B)–(C))
☐ Each individual shareholder is a U.S. citizen or resident alien
☐ Each trust shareholder qualifies as a grantor trust, testamentary trust (2-year window), QSST, ESBT, or voting trust (§ 1361(c)(2), (d), (e))
☐ Each exempt-organization shareholder qualifies under § 401(a) or § 501(c)(3) (§ 1361(c)(6))

Documentation Prerequisites

☐ Articles of Incorporation/Organization filed with the Kentucky Secretary of State; entity in good standing
☐ EIN obtained from the IRS
☐ Bylaws (or LLC operating agreement) in place; single class of stock/economic-rights structure confirmed
☐ Each shareholder's SSN/ITIN, share count, percentage, and acquisition date collected for the consent statement

PART 2 — IRS FORM 2553 LINE-BY-LINE

Part I — Election Information

Timing — When to File (26 U.S.C. § 1362(b))

☐ General rule: File no later than two months and 15 days after the beginning of the tax year the election is to take effect (i.e., the 15th day of the 3rd month). For a calendar-year entity electing for 2026, the deadline is March 16, 2026 (March 15 falls on a Sunday).
☐ Preceding-year rule: The election may be filed at any time during the tax year preceding the first effective tax year.
☐ New entities: The 2-month-and-15-day period runs from the earliest of (a) the date the entity first had shareholders, (b) the date it first had assets, or (c) the date it began doing business.

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

If the deadline passed, relief is generally available under Rev. Proc. 2013-30:

☐ The entity intended to be an S corporation as of the intended effective date
☐ The only reason it is not an S corporation is the failure to file Form 2553 timely
☐ There is reasonable cause for the failure, and the entity acted diligently to correct it
☐ 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 no returns are yet due)
☐ Write "FILED PURSUANT TO REV. PROC. 2013-30" across the top of Form 2553
☐ Attach a reasonable-cause statement; all shareholders sign the consent (see Part 3)

PART 3 — SHAREHOLDER CONSENT STATEMENT

26 U.S.C. § 1362(a)(2) requires the consent of ALL shareholders who hold (or held) stock during the relevant period. Each shareholder signs Column K of Form 2553, or this consent statement is attached.

CONSENT TO S-CORPORATION ELECTION. The undersigned, being all of the shareholders of [____________________________________] (EIN [____________]), consent under 26 U.S.C. § 1362(a)(2) to the corporation's election to be treated as an S corporation effective [__/__/____], and each represents that the information below is true and correct.

PART 4 — ENTITY INTERPLAY (LLC AND DEEMED CORPORATE ELECTION)

LLC Electing S Status

An LLC is by default a disregarded entity (single member) or a partnership (multi-member). To be an S corporation it must first be treated as a corporation for federal tax purposes.

☐ Form 2553 alone (the deemed-8832 shortcut): Under Treas. Reg. § 301.7701-3(c)(1)(v)(C), an eligible entity that timely files Form 2553 is deemed to have also elected to be classified as an association taxable as a corporation (Form 8832) as of the same effective date. A separate Form 8832 is not required when Form 2553 is filed timely.
☐ Late filing: If the S election is late, follow Rev. Proc. 2013-30, which also provides the corporate-classification (deemed-8832) relief.

Corporation Already Taxed as a C Corporation

☐ A C corporation converting to S status should assess built-in gains tax exposure (§ 1374) and the disposition of any accumulated earnings and profits (E&P) — see Part 6.

PART 5 — KENTUCKY STATE S-CORPORATION OVERLAY

Does Kentucky Recognize the Federal S Election?

Yes — automatically. Kentucky conforms to federal Subchapter S treatment. A corporation that is an S corporation for federal purposes is treated as an S corporation for Kentucky income tax purposes. There is NO separate Kentucky S-election form — the federal Form 2553 (and the IRS acceptance, CP261) controls.

☐ Confirm the entity has a Kentucky Corporation/LLET Account Number (obtain via the Kentucky One Stop Business Portal)

Kentucky Return — Form 720S / Form PTE

☐ File the Kentucky S-corporation return annually. The historical form was Form 720S (Kentucky S Corporation Income Tax and LLET Return); the current combined return for S corporations is Form PTE, Pass-Through Entity Income and LLET Return — confirm the current-year form name with the Kentucky DOR.
☐ Issue a Kentucky Schedule K-1 (Form PTE) to each shareholder
☐ The return is generally due the 15th day of the 4th month after the close of the tax year

CRITICAL — Limited Liability Entity Tax (LLET) — KRS § 141.0401

⚠ FLAG: KENTUCKY IMPOSES AN ENTITY-LEVEL TAX ON S CORPORATIONS. Unlike most states, Kentucky levies the Limited Liability Entity Tax (LLET) on S corporations (and most limited-liability entities) regardless of S status and regardless of whether the entity has income. This is a key reason an S election alone does not eliminate Kentucky entity-level tax.

☐ The LLET is computed as the greater of (a) the computed tax or (b) $175 (the $175 annual minimum) under KRS § 141.0401(2)
☐ For entities with Kentucky gross receipts/gross profits of $3,000,000 or less, the LLET is the $175 minimum flat amount
☐ Above $3,000,000, the computed tax is the lesser of 0.095% of Kentucky gross receipts or 0.75% of Kentucky gross profits (still subject to the $175 floor)
☐ The $175 minimum LLET is never creditable against the shareholders' individual income tax — treat it as a permanent annual cost of operating in Kentucky
☐ Sole proprietorships and general partnerships are exempt from the LLET; S corporations and LLCs are not

Income Tax at the S-Corporation Level — KRS § 141.040(4)

☐ An S corporation generally pays no Kentucky corporation income tax at the entity level except if it has built-in gains, excess net passive income, or LIFO recapture under KRS § 141.040(4) (mirroring the federal § 1374/§ 1375 items)

Nonresident Shareholders — Withholding (KRS § 141.206)

☐ The S corporation must withhold Kentucky income tax at the maximum rate on each nonresident individual shareholder's distributive share (KRS § 141.206(4)–(5))
☐ Estimated tax/withholding is required if a nonresident's expected Kentucky liability exceeds $500; use Form 740NP-WH / 740NP-WH-ES
☐ Withholding is not required for a nonresident who has filed an appropriate Kentucky return for the prior year (KRS § 141.206(6))

Elective Pass-Through Entity Tax (PTE Election) — KRS § 141.209

☐ Kentucky allows an annual, irrevocable election under KRS § 141.209 for an S corporation to have the personal income tax imposed at the entity level (SALT-cap workaround; effective for tax years beginning on or after Jan. 1, 2022)
☐ For tax years beginning on or after Jan. 1, 2023, the election may be made during the year or after year-end, no later than the 15th day of the 4th month after year-end (or the 15th day of the 10th month with an extension)
☐ Owners receive a refundable credit equal to their proportionate share of the entity-level tax paid
☐ The PTE election does not affect the separate LLET — the LLET (minimum $175) still applies

PART 6 — POST-ELECTION COMPLIANCE

IRS Confirmation

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

Reasonable Compensation (Shareholder-Employees)

☐ Pay shareholder-employees reasonable compensation as W-2 wages before taking distributions. The IRS may recharacterize distributions as wages (subject to employment tax) where compensation is unreasonably low. Document the basis for the salary (duties, time, comparables).

Built-In Gains Tax — 26 U.S.C. § 1374

☐ If the entity converted from C corporation status, gains on assets held at conversion may trigger the corporate-level built-in gains tax if recognized during the 5-year recognition period. Track the net unrealized built-in gain and fair market values at the conversion date. (Kentucky picks this up at the entity level under KRS § 141.040(4).)

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

☐ If the S corporation has accumulated C corporation E&P and passive investment income exceeds 25% of gross receipts, a corporate-level tax under § 1375 applies; 3 consecutive years over 25% terminates the S election (§ 1362(d)(3)) — monitor annually

Ongoing Federal and Kentucky Filings

☐ File federal Form 1120-S and issue Schedule K-1 to each shareholder annually
☐ File the Kentucky Form 720S / Form PTE annually, pay the LLET (minimum $175), remit nonresident withholding, and remit the § 141.209 PTE tax if elected
☐ Monitor shareholder eligibility — an ineligible transfer (e.g., to a partnership or nonresident alien) terminates the election
☐ Maintain a single class of stock

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 where the original election was filed (no official form; letter format under Treas. Reg. § 1.1362-6(a)(3))
☐ Include the corporation's name, EIN, a statement that it revokes its § 1362(a) election, the number of shares outstanding, and consenting shareholders' signatures and share counts
☐ Effective date: if filed by the 15th day of the 3rd month of the tax year, effective the first day of that year; otherwise the first day of the following year. A prospective date may be specified.

Five-year re-election bar. After a termination or revocation, the corporation generally may not re-elect S status for 5 tax years without IRS consent (§ 1362(g)).

LLET continues regardless. Revoking the federal S election does not end the Kentucky LLET — the LLET applies to the entity (as a C corporation or otherwise) for as long as it has limited liability and does business in Kentucky.

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

Termination occurs automatically if the corporation:

☐ Ceases to qualify as a small business corporation (e.g., exceeds 100 shareholders, issues a second class of stock, or admits an ineligible shareholder) — effective on the date of the disqualifying event (§ 1362(d)(2))
☐ Has C corporation E&P and passive investment income > 25% of gross receipts for 3 consecutive years (§ 1362(d)(3))

☐ Consider requesting inadvertent-termination relief under § 1362(f) where the disqualification was inadvertent and promptly corrected

FILLABLE FIELDS SUMMARY

SOURCES AND REFERENCES

• 26 U.S.C. §§ 1361–1379 (Subchapter S); §§ 1362, 1374, 1375
• IRS Form 2553 and Instructions; IRS Notice CP261
• Rev. Proc. 2013-30 (late election and entity-classification relief)
• Treas. Reg. §§ 1.1362-6, 301.7701-3(c)(1)(v)(C) (deemed corporate classification)
• KRS § 141.0401 (Limited Liability Entity Tax; greater of computed tax or $175 minimum)
• KRS § 141.040(4) (S-corp entity-level income tax — built-in gains, passive income, LIFO recapture)
• KRS § 141.206 (pass-through entity returns; nonresident withholding; Form 740NP-WH)
• KRS § 141.209 (annual pass-through entity tax election)
• Kentucky DOR Form 720S / Form PTE (Pass-Through Entity Income and LLET Return) and Instructions; Schedule K-1 (Form PTE)
• Kentucky DOR Corporation, LLC, and Pass-Through Tax FAQs