S-Corporation Election Package (Form 2553 + North Carolina S-Election)

S-CORPORATION ELECTION PACKAGE — NORTH CAROLINA

OVERVIEW

This package guides a North Carolina corporation or LLC through electing federal S-corporation status on IRS Form 2553 and addresses the North Carolina tax overlay. An S election allows income, losses, deductions, and credits to pass through to shareholders, avoiding entity-level federal income tax under 26 U.S.C. § 1363.

Two distinct steps:

1. Federal election — File IRS Form 2553 with the IRS (Parts 1–4 below).
2. State overlay — Address North Carolina treatment (Part 5 below).

NORTH CAROLINA — NO SEPARATE STATE ELECTION. North Carolina recognizes the federal S election automatically; there is no separate North Carolina S-corporation election for income-tax purposes. The S corporation files Form CD-401S. North Carolina does, however, offer an optional "Taxed PTE" (Taxed S Corporation) election under N.C.G.S. § 105-131.1A, made on the CD-401S return itself.

Package contents:

• Part 1 — Federal Eligibility Checklist (IRC § 1361)
• Part 2 — Form 2553 Line-by-Line
• Part 3 — Shareholder Consent Statement
• Part 4 — Entity Interplay (LLC electing S status)
• Part 5 — North Carolina State Overlay
• Part 6 — Post-Election Compliance
• Part 7 — Revocation
• Fillable Fields
• Sources & References

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

A corporation is eligible to elect S status only if it is a small business corporation meeting ALL of the following.

Entity Requirements (§ 1361(b)(1))

☐ Entity is a domestic corporation (or an LLC/eligible entity electing corporate treatment)
☐ Entity has no more than 100 shareholders (§ 1361(b)(1)(A)) — family members may be counted as one shareholder under § 1361(c)(1)
☐ Entity has only one class of stock (§ 1361(b)(1)(D)) — differences in voting rights alone are permitted
☐ Entity is not an ineligible corporation (§ 1361(b)(2)) — not a financial institution using the reserve method, insurance company, or current/former DISC

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

☐ All shareholders are U.S. citizens or resident aliens — no nonresident aliens (§ 1361(b)(1)(C))
☐ No shareholder is a partnership or corporation (§ 1361(b)(1)(B))
☐ Any trust shareholders are permitted trusts only: grantor trusts, testamentary trusts (2-year limit), QSSTs (§ 1361(d)), ESBTs (§ 1361(e)), or voting trusts
☐ Estates and certain § 401(a)/§ 501(c)(3) tax-exempt organizations are permitted
☐ All shareholders consent to the election (Part 3)

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 Tax Year Election (§ 444 / business purpose)

☐ Complete only if Line F selects a tax year other than a permitted calendar year
☐ Box P / Q / R selected as applicable (natural business year, ownership tax year, § 444 election, or business-purpose request)

Part III — QSST Election

☐ Complete only if a Qualified Subchapter S Trust is a shareholder (§ 1361(d)(2))

Late Election Relief — Rev. Proc. 2013-30

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

☐ Entity intended to be an S corporation as of the intended effective date
☐ Reasonable cause existed for the failure to file timely, and the entity acted diligently to correct it
☐ Request filed within 3 years and 75 days of the intended effective date
☐ The entity (and shareholders) reported consistently with S status on all affected returns, or no returns were yet due
☐ Write "FILED PURSUANT TO REV. PROC. 2013-30" across the top of Form 2553
☐ Attach a reasonable cause statement, signed under penalties of perjury
☐ ALL shareholders for the relevant period sign the form

Filing Method (as of 2026)

☐ Mail or fax to the IRS Service Center designated in the Form 2553 instructions (determined by the entity's state — North Carolina routes to the applicable center listed in the current instructions)
☐ Electronic filing of Form 2553 is not available
☐ Retain proof of mailing/fax confirmation
☐ Await IRS acceptance letter CP261 (allow ~60 days)

PART 3 — SHAREHOLDER CONSENT STATEMENT

ALL shareholders must consent. The consent is made in Column K of Form 2553 or on an attached statement. An incomplete consent invalidates the election.

Consent language: Under penalties of perjury, the undersigned shareholder consents to the election of the above-named corporation to be treated as an S corporation under 26 U.S.C. § 1362(a), and declares the information provided is true, correct, and complete.

PART 4 — ENTITY INTERPLAY (LLC ELECTING S STATUS)

A North Carolina LLC (or other eligible entity) may elect S status. Key mechanics:

☐ LLC filing Form 2553 alone: Under Treas. Reg. § 301.7701-3(c)(1)(v)(C), an eligible entity that timely files Form 2553 is deemed to have elected corporate classification (Form 8832) as of the S-election effective date — a separate Form 8832 is generally NOT required.
☐ Corporation: A North Carolina corporation files only Form 2553.
☐ Confirm the operating agreement / bylaws do not create a second class of stock (e.g., disproportionate distribution/liquidation rights) — this would terminate the election.
☐ Confirm single class of stock is reflected in capital accounts and distribution provisions.
☐ A North Carolina LLC taxed as an S corporation files Form CD-401S (not the partnership Form D-403).

PART 5 — NORTH CAROLINA STATE S-CORP OVERLAY

NO SEPARATE NORTH CAROLINA ELECTION. North Carolina recognizes the federal S election; per the NCDOR CD-401S instructions, "there is no separate S election for North Carolina income tax purposes." The S corporation files Form CD-401S.

A. Recognition Rule — North Carolina

☐ Automatic recognition of federal S status — no separate North Carolina S election
☐ S corporation files Form CD-401S (North Carolina S Corporation Tax Return)
☐ North Carolina S corporations are subject to the franchise tax (Form CD-401S includes the franchise tax computation) even though income passes through
☐ A nonresident individual shareholder is generally not required to file a North Carolina return where the corporation accounts for the shareholder's share (see B)

B. Nonresident Shareholder Withholding

☐ Where a nonresident shareholder does not sign a Nonresident Shareholder Agreement (Schedule NC-NA) to file and pay North Carolina tax, the S corporation must withhold/pay North Carolina tax on that shareholder's share of North Carolina income (compliance parallels the nonresident-owner rules in N.C.G.S. § 105-154(d))
☐ Schedule NC K-1 reports each shareholder's share of income, adjustments, and credits

C. Optional Taxed PTE Election — Taxed S Corporation (N.C.G.S. § 105-131.1A)

North Carolina's PTE workaround for the federal SALT cap is the "Taxed S Corporation" / Taxed PTE election, made on the return itself.

☐ The S corporation may elect, on its timely filed Form CD-401S (the return required under N.C.G.S. § 105-131.7), to be a "taxed S corporation" — i.e., to have the income tax imposed at the entity level under N.C.G.S. § 105-131.1A
☐ The election is made by marking the "Taxed PTE Election" box on the front of Form CD-401S
☐ The election is an annual election for the tax year covered by the return
☐ IRREVOCABLE for the year: for tax years beginning on or after January 1, 2023, the election may not be made or revoked after the return is filed (§ 105-131.1A(a))
☐ The entity-level tax is imposed on the corporation's North Carolina taxable income at the individual income tax rate under N.C.G.S. § 105-153.7
☐ Shareholders of a taxed S corporation take a corresponding deduction (§ 105-153.5(c3)(1)) and addition (§ 105-153.5(c3)(2)) so income is not taxed twice

D. North Carolina Return & Tax Summary

PART 6 — POST-ELECTION COMPLIANCE

Reasonable Compensation

☐ Shareholder-employees who perform services must receive reasonable compensation (wages subject to FICA) before taking distributions — the IRS may recharacterize distributions as wages where compensation is unreasonably low (see Rev. Rul. 74-44; reasonable-comp scrutiny)
☐ Document the basis for the compensation amount (comparable salaries, duties, time, profitability)

Built-In Gains Tax — § 1374

☐ If the entity converted from C-corp status, a corporate-level built-in gains (BIG) tax under 26 U.S.C. § 1374 may apply to net recognized built-in gains on assets held at conversion, generally during the 5-year recognition period
☐ Obtain a valuation of assets as of the S-election date to fix the net unrealized built-in gain

Excess Net Passive Income Tax — § 1375

☐ If the entity has C-corp accumulated E&P and passive investment income exceeds 25% of gross receipts, a corporate-level tax under 26 U.S.C. § 1375 applies
☐ Three consecutive years over the 25% threshold (with E&P) terminates the election under § 1362(d)(3)

Ongoing Federal & North Carolina Compliance

☐ File IRS Form 1120-S and issue Schedule K-1 to each shareholder annually
☐ File North Carolina Form CD-401S annually; pay the franchise tax and any Taxed PTE / withholding amounts
☐ Issue Schedule NC K-1 to each shareholder
☐ Maintain single class of stock and monitor shareholder eligibility (an ineligible transfer terminates the election)
☐ Keep the CP261 acceptance letter permanently
☐ Re-evaluate the Taxed PTE election each year (annual; irrevocable once the return is filed)

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

Voluntary Revocation — § 1362(d)(1)

☐ Shareholders holding more than 50% of issued and outstanding shares (voting and nonvoting) consent
☐ File a revocation statement with the IRS (no official form — letter format) signed by the corporation and consenting shareholders
☐ 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 tax year; or a prospective date may be specified
☐ Five-year rule: after revocation/termination, a new S election generally cannot be made for 5 tax years without IRS consent (§ 1362(g))

North Carolina

☐ Because North Carolina conforms to federal status, a federal revocation ends North Carolina S treatment; the entity then files as a C corporation (Form CD-405) for North Carolina
☐ The North Carolina Taxed PTE election is a per-year election on the CD-401S — discontinuing it does not require a separate revocation, but it cannot be changed for a year once that year's return is filed

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

Termination occurs automatically if the entity ceases to qualify (e.g., exceeds 100 shareholders, issues a second class of stock, an ineligible shareholder acquires stock) or fails the passive-income test for 3 consecutive years (with C-corp E&P).

FILLABLE FIELDS — ENTITY SUMMARY

SOURCES & REFERENCES

• 26 U.S.C. §§ 1361–1368 (Subchapter S); §§ 1374, 1375 (corporate-level taxes)
• IRS Form 2553 and Instructions; Form 1120-S; Schedule K-1
• Rev. Proc. 2013-30 (late election relief); Rev. Rul. 74-44 (reasonable compensation)
• Treas. Reg. § 1.1362-6 (election procedures); § 301.7701-3 (entity classification / deemed Form 8832)
• N.C.G.S. § 105-131 et seq. (S corporation income tax)
• N.C.G.S. § 105-131.1A (Taxation of S corporation as a taxed pass-through entity — Taxed PTE election; rate per § 105-153.7)
• N.C.G.S. § 105-131.7 (S corporation return; election made on timely-filed return)
• N.C.G.S. § 105-154(d) (nonresident owner withholding); § 105-153.5(c3) (shareholder addition/deduction)
• North Carolina Form CD-401S and instructions ("There is no separate S election for North Carolina income tax purposes"); Schedule NC-NA; Schedule NC K-1
• NCDOR PTE / Taxed PTE guidance (ncdor.gov)