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

S-CORPORATION ELECTION PACKAGE (FORM 2553 + OHIO STATE OVERLAY)

OVERVIEW

An S corporation is not a separate kind of entity. It is a federal tax classification, under Subchapter S of the Internal Revenue Code, available to a qualifying corporation or LLC that timely files IRS Form 2553. When the election is in effect, the entity generally pays no federal income tax; instead, items of income, loss, deduction, and credit pass through to the shareholders, who report them on their personal returns. This avoids the "double taxation" of a C corporation.

Why elect S status:

• Pass-through taxation — no entity-level federal income tax (26 U.S.C. § 1363).
• Potential self-employment / payroll tax savings: only a shareholder-employee's reasonable compensation (W-2 wages) is subject to FICA; distributions beyond reasonable compensation are not.
• Limited liability of the underlying corporation or LLC is retained.

Why an Ohio owner should care about the state overlay:

• Ohio recognizes the federal S election automatically — there is no separate Ohio S election form. S corporation income flows through to the shareholders' Ohio individual income tax returns. See Part 5.
• CAUTION — Ohio Commercial Activity Tax (CAT). Ohio imposes no corporate income tax, but it does impose the Commercial Activity Tax (CAT), a gross-receipts privilege tax under Ohio R.C. ch. 5751 — and the CAT applies regardless of S-corporation status. S status does NOT exempt the entity from the CAT. See Part 5.
• Ohio offers an optional Electing Pass-Through Entity (PTE) tax under R.C. § 5747.38 (filed on Form IT 4738) — a federal SALT-cap workaround.

Entity / filing fields (complete before filing):

PART 1 — FEDERAL ELIGIBILITY CHECKLIST (IRC § 1361)

Confirm EVERY item below before filing Form 2553. A single failure makes the entity ineligible and any election invalid.

Entity-level requirements

☐ The entity is a domestic corporation or an eligible domestic entity (e.g., an LLC) electing to be treated as a corporation (26 U.S.C. § 1361(b)(1)).
☐ The entity has no more than 100 shareholders (§ 1361(b)(1)(A)). Members of a family (a common ancestor, lineal descendants, and their spouses/former spouses) may be counted 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; differences in distribution or liquidation rights are not.
☐ The entity is not an ineligible corporation under § 1361(b)(2) (e.g., a financial institution using the reserve method of accounting for bad debts, an insurance company taxed under subchapter L, a possessions-tax-credit corporation, or a current/former DISC).

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

☐ Every shareholder is an eligible shareholder: an individual (U.S. citizen or resident), an estate, a qualifying trust, or a § 401(a) / § 501(c)(3) tax-exempt organization.
☐ No shareholder is a nonresident alien (§ 1361(b)(1)(C)).
☐ No shareholder is a partnership or a corporation.
☐ Any trust shareholder is a permitted trust: a grantor trust, a former-grantor trust (2-year window), a testamentary trust (2-year window), a voting trust, a Qualified Subchapter S Trust (QSST) (§ 1361(d)), or an Electing Small Business Trust (ESBT) (§ 1361(e)).

PART 2 — FEDERAL FORM 2553, LINE BY LINE

Part I — Election Information

Part II — Selection of Fiscal Tax Year

Complete only if the entity wants a tax year other than the required year (generally the calendar year). State the business-purpose basis (e.g., § 444 election, natural business year under Rev. Proc. 2006-46, or ownership tax year).

Part III — QSST Election

A Qualified Subchapter S Trust beneficiary uses Part III (or a separate statement under § 1361(d)(2)) to elect QSST treatment so the trust qualifies as an eligible shareholder.

Part IV — Late Corporate Classification Election Representations

Used when the entity also seeks late S-election relief (and, for an LLC, a deemed entity classification election). See timing and relief below.

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

• Timely election: file by the 15th day of the 3rd month of the tax year the election is to take effect, or at any time during the immediately preceding tax year.
• New entities: the first tax year begins on the earliest of when the corporation has shareholders, acquires assets, or begins doing business; file within 2 months and 15 days of that date.
• Late-election relief — Rev. Proc. 2013-30: if the deadline is missed, relief is generally available if (1) the entity intended to be an S corp as of the intended effective date, (2) the only reason it is not an S corp is the missed/defective filing, (3) there is reasonable cause and the entity acted diligently, and (4) the relief request is 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 and attach a reasonable-cause statement signed by all shareholders.

Filing method

Form 2553 is filed by mail or fax to the IRS service center designated in the current instructions for the entity's state. Electronic filing of a standalone Form 2553 is not generally available; it may be attached to a timely filed Form 1120-S for certain late elections. Retain the IRS acceptance notice (CP261) permanently.

PART 3 — SHAREHOLDER CONSENT STATEMENT (ALL SHAREHOLDERS MUST CONSENT)

Every shareholder on the effective date (and, for a preceding-year election, those who held stock during that prior period) must consent. Reproduce and attach extra rows as needed.

By signing, each shareholder consents to the S corporation election under 26 U.S.C. § 1362(a) and represents that the information provided is true and correct.

PART 4 — ENTITY INTERPLAY (LLC ELECTING S STATUS)

An LLC is, by default, a disregarded entity (single member) or a partnership (multi-member). To be taxed as an S corporation it must first be classified as an association taxable as a corporation.

• A single Form 2553, filed on time, lets an eligible LLC elect S status without separately filing Form 8832 (Entity Classification Election). A timely, properly completed Form 2553 is treated as a deemed Form 8832 corporate-classification election effective on the same date (Treas. Reg. § 301.7701-3(c)(1)(v)(C)).
• If the LLC wants corporate (C) classification effective on a different date than the S election, file Form 8832 separately.
• Confirm the LLC operating agreement does not create a second class of stock (e.g., disproportionate distribution/liquidation rights or preferred returns), which would void S eligibility.

PART 5 — OHIO STATE S-CORP OVERLAY

Recognition rule — AUTOMATIC (no separate Ohio election)

Ohio automatically recognizes the federal S election. There is no separate Ohio S-corporation election form. Ohio has no separate corporate income tax on S corporations; instead, the S corporation's income passes through and is reported on the shareholders' Ohio individual income tax returns (Form IT 1040) under Ohio R.C. ch. 5747. An LLC taxed as an S corporation federally is treated the same way for Ohio purposes.

⚠ CAUTION — OHIO COMMERCIAL ACTIVITY TAX (CAT) APPLIES REGARDLESS OF S STATUS

The CAT is an annual gross-receipts privilege tax imposed under Ohio R.C. ch. 5751 on the privilege of doing business in Ohio. It applies to all business structures — including S corporations — and electing S status does NOT exempt the entity from the CAT. The CAT is measured by Ohio taxable gross receipts, not net income.

• Rate: 0.26% (0.0026) of taxable gross receipts above the exclusion.
• Exclusion amount (recent increases): the exclusion rose to $3 million for tax year 2024 and to $6 million for tax years 2025 and forward. A business with Ohio taxable gross receipts at or below the exclusion is not required to register, file, or pay the CAT for that year.
• Annual Minimum Tax (AMT) eliminated beginning in 2024 (the tiered $150–$2,600 AMT no longer applies).
• Registration / filing: a taxpayer must register within 30 days of exceeding the threshold and file quarterly returns; out-of-state businesses are subject if they have "bright-line presence" (e.g., $500,000+ Ohio sales).
• The CAT is treated as a cost of doing business and cannot be separately billed to customers like a sales tax.

Return / form — pass-through filings for nonresident / non-electing owners

• Form IT 4708 — composite return: the S corporation may file a composite Ohio income tax return on behalf of qualifying nonresident investors, paying the tax on their behalf (R.C. § 5747.08).
• Form IT 1140 — withholding return: the S corporation pays a withholding tax on behalf of nonresident/non-individual investors who are not included in a composite return.
• Resident individual shareholders report their pass-through income directly on their Ohio IT 1040.

Optional Electing Pass-Through Entity (PTE) tax — SALT-cap workaround (R.C. § 5747.38)

• Enacted by S.B. 246 (2022), the Electing Pass-Through Entity (EPTE) tax lets a qualifying pass-through entity (including an S corporation) elect to pay Ohio income tax at the entity level, generating a federal deduction as a SALT-cap workaround (consistent with IRS Notice 2020-75).
• The election is made by filing Form IT 4738; no separate election form is required, and the election is irrevocable for the year once made.
• The IT 4738 is due April 15 after the entity's fiscal year end (federal extension recognized; extension to file, not to pay).
• Qualifying members claim a credit for the entity-level tax paid on their Ohio individual returns. The EPTE tax is distinct from the IT 1140 (withholding) and IT 4708 (composite), which the entity pays on behalf of owners.

Other Ohio items to confirm

☐ Maintain good standing with the Ohio Secretary of State (corporations and LLCs).
☐ Register for CAT within 30 days of exceeding the gross-receipts exclusion ($6M for 2025+); cancel any CAT account if gross receipts will stay below the exclusion.
☐ Register for Ohio sales/use tax if selling taxable goods/services.
☐ Register for Ohio (and applicable municipal) employer withholding and unemployment before paying shareholder-employee wages. Note: Ohio municipalities impose their own net-profits/income taxes on businesses.

PART 6 — POST-ELECTION COMPLIANCE

☐ Reasonable compensation. A shareholder who performs services must be paid reasonable compensation as W-2 wages before taking distributions; the IRS may recharacterize disguised wages and assess back FICA, penalties, and interest.
☐ Payroll setup. Run payroll, withhold and deposit federal, Ohio, and municipal income tax and FICA, and file Forms 941/940 and Ohio/municipal withholding returns.
☐ Distributions. Distributions to shareholders are generally tax-free to the extent of stock basis and the accumulated adjustments account (AAA); track basis carefully (§ 1367).
☐ Built-in gains tax (§ 1374). If the entity converted from C-corporation status, gain on pre-conversion appreciated assets sold within the 5-year recognition period is taxed at the entity level.
☐ Passive investment income (§ 1375). If the entity has accumulated C-corporation earnings and profits and passive investment income exceeds 25% of gross receipts, an entity-level tax applies; exceeding 25% for 3 consecutive years terminates the S election (§ 1362(d)(3)).
☐ One class of stock maintained. Avoid side agreements, disproportionate distributions, or debt that could be reclassified as a second class of stock.
☐ CAT compliance maintained. Continue to monitor Ohio taxable gross receipts against the $6M exclusion; register/file/pay the CAT if exceeded.
☐ Annual federal/state returns. File Form 1120-S with Schedules K-1 federally; file IT 4708 (composite) and/or IT 1140 (withholding) as applicable, plus IT 4738 if the EPTE election is made; resident shareholders report on Ohio IT 1040.
☐ Recordkeeping. Retain Form 2553, the CP261 acceptance notice, shareholder consents, stock/ownership records, CAT records (4-year retention), and minutes permanently.

PART 7 — REVOCATION / TERMINATION (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 (no official form; a signed letter identifying the entity, EIN, and effective date, with shareholder consents).
☐ Effective date: if filed by the 15th day of the 3rd month of the tax year, it is effective the first day of that year; otherwise the first day of the following tax year. A prospective date may be specified.

Automatic termination (§ 1362(d)(2)–(3))

Termination is automatic if:
☐ The entity ceases to qualify as a small business corporation (e.g., exceeds 100 shareholders, an ineligible shareholder acquires stock, or a second class of stock is created) — effective on the date of the disqualifying event.
☐ The entity has C-corporation E&P and passive investment income exceeds 25% of gross receipts for 3 consecutive tax years — terminating at the start of the next year.

Five-year re-election bar (§ 1362(g))

After revocation or termination, the entity generally may not re-elect S status for 5 tax years without IRS consent.

Ohio effect

Because Ohio's pass-through treatment follows the federal S classification, a federal revocation/termination ends Ohio S treatment for the same period; the former S corporation's income is then taxed as a C corporation under federal law (Ohio has no separate corporate income tax). The CAT continues to apply regardless of S, C, or terminated status — revocation does not affect CAT obligations.

SIGNATURE BLOCK

Authorized Officer

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

SOURCES AND REFERENCES

• 26 U.S.C. §§ 1361–1368, 1374, 1375 (Subchapter S)
• 26 U.S.C. § 1362 (election, revocation, termination)
• IRS Form 2553 and Instructions; IRS Notice CP261
• Rev. Proc. 2013-30 (late election relief); Treas. Reg. § 1.1362-6; Treas. Reg. § 301.7701-3 (entity classification)
• Ohio R.C. ch. 5747 (Income tax); Ohio R.C. ch. 5751 (Commercial Activity Tax)
• Ohio R.C. § 5747.38 (Electing Pass-Through Entity tax) — Form IT 4738
• Ohio Department of Taxation — Commercial Activity Tax (CAT) — https://tax.ohio.gov/business/commercial-activity-tax
• Ohio Department of Taxation — IT 4738 Electing Pass-Through Entity Income Tax Return — https://tax.ohio.gov/business/ohio-business-taxes/pass-through-entities/it-4738-electing-pass-through-entity
• Ohio Department of Taxation — Pass-Through Entity returns (IT 4708 composite; IT 1140 withholding)