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

S-CORPORATION ELECTION PACKAGE (FORM 2553 + PENNSYLVANIA 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 a Pennsylvania owner MUST read the state overlay first — PA recognition is AUTOMATIC, with an opt-out:

• For tax years beginning after Dec. 31, 2005, a corporation with a valid federal Subchapter S election is AUTOMATICALLY a Pennsylvania S corporation — there is no separate affirmative PA S election to make. See Part 5.
• BUT Pennsylvania uniquely allows a corporation to affirmatively ELECT NOT to be a PA S corporation by filing Form REV-976. That opt-out must be signed by 100% of the shareholders and, once made, cannot be revoked for five years. See the FLAG in Part 5.
• A Pennsylvania S corporation files Form PA-20S/PA-65 (PA S Corporation/Partnership Information Return). Resident shareholders pay PA Personal Income Tax on their pro rata share; nonresident shareholders are subject to PA withholding.

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.
• Pennsylvania note: an LLC with a valid federal S election is automatically a Pennsylvania S corporation (unless it opts out via REV-976) and reports on Form PA-20S/PA-65, not as a partnership.

PART 5 — PENNSYLVANIA STATE S-CORP OVERLAY

Recognition rule — AUTOMATIC (no separate PA election)

Pennsylvania eliminated its separate state S election. For tax years beginning after Dec. 31, 2005, any corporation with a valid federal Subchapter S election is AUTOMATICALLY a Pennsylvania S corporation. The former PA S Corporation Election and Shareholders' Consent (Form REV-1640) is no longer required to obtain PA S status. (Historically, under 61 Pa. Code § 9.13, an affirmative election on Form REV-1640 was required; that affirmative-election regime was superseded for post-2005 tax years.)

>>> FLAG: PENNSYLVANIA "OPT-OUT" — ELECT NOT TO BE A PA S CORPORATION (REV-976) <<<

Pennsylvania is unusual: a federal S corporation that does NOT want PA S treatment must affirmatively OPT OUT by filing Form REV-976 — "Election Not To Be Taxed As A Pennsylvania S Corporation."

• The REV-976 opt-out must be signed by 100% of the shareholders of the corporation.
• Once made, the opt-out election CANNOT be revoked for FIVE YEARS.
• A REV-976 covers the corporation and all of its qualified Subchapter S subsidiaries (a Q-Sub cannot be a PA S corporation, or elect out, separately from its parent); attach a schedule identifying each Q-Sub.
• Timing: file REV-976 on or before the due date (or extended due date) of the report for the first tax period in which the opt-out is to be effective. If the corporation is not required to file a PA Corporate Tax Report, file REV-976 by the 15th day of the 4th month following the end of that first tax period.
• A corporation that elects OUT is taxed as a C corporation for PA and is subject to the Corporate Net Income Tax on its PA taxable income. (Pennsylvania's CNIT rate is being phased down over time; verify the current-year rate before relying on it.)

Practical effect: most owners do NOT file REV-976 — they want the default PA S (pass-through) treatment. The opt-out is a deliberate, binding choice; do not file it inadvertently.

Return / form

• A Pennsylvania S corporation files Form PA-20S/PA-65 (PA S Corporation/Partnership Information Return), with PA Schedules RK-1 (resident shareholders) and NRK-1 (nonresident shareholders).
• Each resident shareholder is subject to PA Personal Income Tax on the shareholder's pro rata share of PA S corporation income, whether distributed or not.
• Each nonresident shareholder is subject to PA Personal Income Tax on income from PA sources. A PA S corporation is jointly liable with, and required to withhold and remit PA Personal Income Tax for, its nonresident shareholders on PA-source income (use PA-40ESR (F/C) for the first withholding payment).
• A PA resident shareholder of a federal S corporation that does not do business in PA (and did not elect out) may still trigger a PA-20S/PA-65 filing obligation; confirm with the Department of Revenue.

Optional pass-through entity (PTE) elective tax

• Pennsylvania has not enacted a PTE-level elective tax (SALT-cap workaround) as of this drafting. [Verify current law before relying on the absence of a PA PTE election — legislation in this area changes frequently.]

Other Pennsylvania items to confirm

☐ Maintain good standing with the PA Department of State (Bureau of Corporations and Charitable Organizations); file the decennial report when due.
☐ Register for employer withholding and Unemployment Compensation before paying shareholder-employee wages.
☐ Register for Sales, Use & Hotel Occupancy Tax if selling taxable goods/services.
☐ If you intend to opt out of PA S treatment, complete and timely file Form REV-976 (remembering the 5-year lock and 100%-shareholder signature requirement).

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 and PA income tax and FICA, file Forms 941/940, and file PA employer withholding and UC 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 federally. Pennsylvania also taxes a PA S corporation's net recognized built-in gain under the Corporate Net Income Tax (see 61 Pa. Code § 9.13 / 72 P.S. § 7307).
☐ 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.
☐ Annual federal/state returns. File Form 1120-S with Schedules K-1 federally and PA Form PA-20S/PA-65 with PA Schedules RK-1/NRK-1; remit nonresident withholding.
☐ Recordkeeping. Retain Form 2553, the CP261 acceptance notice, shareholder consents (and any REV-976 opt-out), stock/ownership records, 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.

Pennsylvania effect

Because PA S status follows the federal election automatically, a federal revocation/termination ends PA S treatment for the same period; the entity then files as a C corporation subject to the PA Corporate Net Income Tax. Note that this is distinct from the PA REV-976 opt-out (Part 5) — the opt-out is a separate, PA-only, 5-year-binding choice that does not affect the federal S election.

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)
• 72 P.S. § 7301 et seq. (Tax Reform Code of 1971); 72 P.S. § 7307 (PA S corporation defined)
• 61 Pa. Code § 9.13 (Pennsylvania S Corporation election)
• PA Form REV-976 — Election Not To Be Taxed As A Pennsylvania S Corporation, and instructions
• PA Form PA-20S/PA-65 (PA S Corporation/Partnership Information Return) and instructions
• Pennsylvania Department of Revenue — Partnerships/S Corporations/LLCs — https://www.revenue.pa.gov/