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

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

OVERVIEW

This package walks a corporation (or an LLC electing corporate then S treatment) through:

1. Confirming federal S-corporation eligibility under IRC § 1361;
2. Completing and filing IRS Form 2553 on time (or under late-relief procedures);
3. Collecting the required shareholder consents;
4. Understanding the entity-classification interplay for LLCs; and
5. Handling the Massachusetts state overlay.

MASSACHUSETTS FLAG — READ FIRST. Massachusetts recognizes federal S status with no separate state S-election, and the S corporation files Form 355S. BUT Massachusetts imposes a corporate excise on S corporations: (1) every S corporation owes at least the minimum excise ($456) plus the non-income (net-worth/property) measure; and (2) S corporations with total receipts of $6 million or more pay an entity-level income measure at a tiered "larger-S-corporation" rate (≈2% for receipts of $6M–$9M; ≈3% for receipts ≥ $9M). At the individual level, shareholders are also subject to the 4% "millionaire" surtax on taxable income over $1 million.

PART 1 — FEDERAL ELIGIBILITY CHECKLIST (IRC § 1361)

Entity Eligibility (26 U.S.C. § 1361(b))

☐ Entity is a domestic corporation, or a domestic LLC that will elect corporate tax treatment
☐ Entity has no more than 100 shareholders (family members may be counted as one under § 1361(c)(1))
☐ Entity has only one class of stock (differences in voting rights alone are permitted — § 1361(c)(4))
☐ Entity is not an ineligible corporation (a bank/thrift using the reserve method, an insurance company taxed under subchapter L, a possessions-tax-credit corporation, or a current/former DISC)

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

☐ All shareholders are U.S. citizens or resident aliens — no nonresident-alien shareholders
☐ No shareholder is a partnership or a corporation
☐ Any trust shareholder is a permitted trust: grantor trust, testamentary trust (2-year limit), QSST, ESBT, or voting trust
☐ Estates and certain § 401(a) / § 501(c)(3) tax-exempt organizations are permitted shareholders
☐ Each shareholder will provide a valid SSN or ITIN for the consent statement

Pre-Filing Housekeeping

☐ Entity is properly formed and in good standing with the Massachusetts Secretary of the Commonwealth
☐ EIN obtained from the IRS
☐ Bylaws / operating agreement in place; stock or membership interests issued
☐ Only one class of stock / equity is outstanding as of the intended effective date

PART 2 — IRS FORM 2553, LINE BY LINE

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

Part I — Election Information

Part II — Fiscal Year (Complete only if a non-calendar tax year is requested)

☐ Natural business year under Rev. Proc. 2006-46 (§ 444 election or business-purpose request)
☐ Ownership tax year
☐ Section 444 election (file Form 8716)

Part III — QSST Election (Complete only if a QSST holds stock)

☐ QSST beneficiary income-deemed-owner election attached

Part IV — Late Corporate Classification Election Representations

☐ Complete only if a late entity-classification election is requested together with the S election (see Part 4)

PART 3 — SHAREHOLDER CONSENT STATEMENT

ALL shareholders who own stock on the election effective date — or at any time during the portion of the tax year before the election is filed — must consent (26 U.S.C. § 1362(a)(2); Treas. Reg. § 1.1362-6).

The undersigned shareholders consent to the entity's election to be treated as an S corporation under 26 U.S.C. § 1362(a), effective [__/__/____].

PART 4 — ENTITY INTERPLAY (LLC ELECTING S STATUS)

A Massachusetts LLC that wants to be taxed as an S corporation does not have to file Form 8832 first. Under Treas. Reg. § 301.7701-3(c)(1)(v)(C), an eligible entity that timely files Form 2553 alone is deemed to have elected to be classified as an association (corporation) under Form 8832 as of the same effective date. Key points:

☐ LLC files Form 2553 with the effective date desired for S status
☐ No separate Form 8832 is required when Form 2553 is timely (deemed corporate election)
☐ If the corporate-classification election is itself late, complete Part IV of Form 2553 with the late-classification representations
☐ Confirm the LLC's operating agreement does not create a second class of equity (disproportionate distribution/liquidation rights can violate the one-class-of-stock rule)

Massachusetts conformity note. Massachusetts conforms to the federal check-the-box rules. A federal QSub is generally disregarded for Massachusetts purposes; its income, property, and net worth are included on the parent S corporation's Form 355S (M.G.L. c. 63, § 32D(b)).

PART 5 — MASSACHUSETTS STATE S-CORP OVERLAY (KEY SECTION)

CRITICAL — RECEIPTS-BASED ENTITY EXCISE. VERIFY current rates with a Massachusetts CPA before filing.

A. Recognition — No Separate State Election

Massachusetts recognizes federal Subchapter S status for purposes of both the personal income tax (M.G.L. c. 62) and the corporate excise (M.G.L. c. 63) and has no separate S-election process (830 CMR 62.17A.2). A federal S corporation is automatically an S corporation in Massachusetts.

B. The Corporate Excise on S Corporations (Form 355S)

Even as a pass-through, a Massachusetts S corporation is subject to the corporate excise under M.G.L. c. 63, § 39, filed on Form 355S. The excise has two measures plus a floor:

☐ Minimum excise — $456. Every S corporation owes at least the minimum excise, even with no income.
☐ Non-income (net-worth/property) measure — generally $2.60 per $1,000 of the greater of taxable Massachusetts tangible property or taxable net worth. This applies to S corporations regardless of receipts.
☐ Income measure (large S corporations only) — see subsection C.

C. Receipts-Based "Larger-S-Corporation" Income Measure (M.G.L. c. 63, § 32D)

FLAG — RECEIPTS THRESHOLDS. Under M.G.L. c. 63, § 32D(a)(ii), an S corporation with total receipts of $6,000,000 or more must pay an entity-level income measure at a special tiered rate in lieu of the standard § 39 corporate rate:

☐ Determine total receipts = gross receipts or sales less returns and allowances, plus dividends, interest, royalties, capital gain net income, and rental income (cost of goods sold is NOT deductible in this computation)
☐ Apply the tiered rate to net income determined without taking Subchapter S into account (i.e., as if a C corporation), per § 32D(a)(ii)
☐ Apply the commissioner's aggregation rules for unitary S corporations / QSubs under common control

D. Shareholder-Level 4% Surtax ("Millionaire Tax")

Income passing through to individual shareholders is reported on their Massachusetts personal returns. For tax years beginning on or after January 1, 2023, an additional 4% surtax applies to a taxpayer's taxable income exceeding $1,000,000 (Mass. Const. amend. art. 44 / "Fair Share Amendment"; M.G.L. c. 62, § 4). The $1M threshold is indexed annually. Note: the surtax applies at the chapter 62 individual level and generally cannot be circumvented through the pass-through mechanics.

E. Return, Tax, and Filing Snapshot

PART 6 — POST-ELECTION COMPLIANCE

IRS Confirmation

☐ Retain the IRS acceptance letter (CP261) permanently
☐ If no response within ~60 days, call the IRS Business & Specialty Tax Line: (800) 829-4933

Federal Ongoing Obligations

☐ File Form 1120-S annually; issue Schedule K-1 to each shareholder
☐ Reasonable compensation — pay shareholder-employees a reasonable W-2 salary before distributions (Rev. Rul. 74-44; recurring IRS audit issue)
☐ Built-in gains tax (§ 1374) — if the entity converted from C-corp status, monitor the 5-year recognition period for net built-in gains
☐ Passive investment income tax (§ 1375) — if the entity has C-corp earnings & profits and passive investment income exceeds 25% of gross receipts, an entity-level tax applies; 3 consecutive years of excess passive income terminates the S election (§ 1362(d)(3))
☐ Maintain a single class of stock and only eligible shareholders

Massachusetts Ongoing Obligations

☐ File Form 355S by the 15th day of the 3rd month after year-end (file/pay electronically via MassTaxConnect)
☐ Pay at least the $456 minimum excise plus the non-income measure each year
☐ Track total receipts annually — crossing the $6M / $9M thresholds triggers the entity-level income measure
☐ Monitor whether the S corporation is part of a combined group (Form 355U); a combined-group S corporation still files Form 355S (informational)
☐ Issue Massachusetts Schedule SK-1 to shareholders; file the Annual Report with the Secretary of the Commonwealth

PART 7 — REVOCATION AND TERMINATION

Voluntary Federal Revocation (26 U.S.C. § 1362(d)(1))

☐ Shareholders holding more than 50% of the shares (voting and nonvoting) consent
☐ File a revocation statement with the IRS (no official form — letter format citing § 1362(a)) signed by an authorized officer, with shareholder consents attached
☐ Effective date: if filed on or before the 15th day of the 3rd month, retroactive to the first day of that tax year; otherwise the first day of the following tax year; or a stated prospective date

Automatic Federal Termination (26 U.S.C. § 1362(d)(2)–(3))

☐ Entity ceases to qualify (exceeds 100 shareholders, ineligible shareholder acquires stock, or a second class of stock is created) — effective on the date of the disqualifying event
☐ Passive investment income exceeds 25% of gross receipts for 3 consecutive years while the entity has C-corp E&P

Massachusetts Side

☐ Because Massachusetts follows the federal classification, a federal revocation/termination ends Massachusetts S treatment for the affected year — the entity then files as a C corporation (Form 355) and pays the full § 39 excise on its income
☐ Coordinate the change of return type and any change in the minimum/income measure for the year of revocation

FILLABLE SUMMARY FIELDS

Authorized Officer Signature: ____________________________________
Name: [____________________] Title: [____________________] Date: [__/__/____]

SOURCES AND REFERENCES

• 26 U.S.C. §§ 1361–1368, 1374, 1375 (Subchapter S)
• IRS Form 2553 and Instructions; Rev. Proc. 2013-30 (late election relief)
• Treas. Reg. § 1.1362-6 (election procedures); Treas. Reg. § 301.7701-3 (deemed Form 8832)
• M.G.L. c. 63, § 32D (S corporations; net income measure; receipts thresholds)
• M.G.L. c. 63, § 39 (business corporation excise — income and non-income measures; minimum $456)
• M.G.L. c. 62, § 4 (individual rate; 4% surtax under Fair Share Amendment)
• 830 CMR 62.17A.2 (Massachusetts taxation of S corporations and shareholders)
• Massachusetts DOR — Form 355S (S Corporation Excise Return) and instructions; 4% Surtax guidance (mass.gov)