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

S-CORPORATION ELECTION PACKAGE (FORM 2553 + SOUTH CAROLINA 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 South Carolina owner MUST read the state overlay first:

• South Carolina recognizes the federal S election automatically — there is no separate South Carolina S election. See Part 5.
• A South Carolina S corporation files Form SC1120S and must address 5% withholding on nonresident shareholders (S.C. Code § 12-8-590) unless an exception or composite return applies. See the FLAG in Part 5.
• South Carolina offers an optional Active Trade or Business pass-through entity (PTE) election (a SALT-cap workaround), made on Form I-435 with the SC1120S.

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.
• South Carolina note: an LLC with a valid federal S election files Form SC1120S for South Carolina and is treated as an S corporation (an LLC taxed as a partnership files SC1065). The LLC and any S corporation that does business in South Carolina also owes the annual corporate license fee (see Part 5).

PART 5 — SOUTH CAROLINA STATE S-CORP OVERLAY

Recognition rule — AUTOMATIC (no separate SC election)

South Carolina recognizes the federal S election automatically (S.C. Code § 12-6-590). A corporation doing business in South Carolina with a valid Subchapter S election granted by the IRS must file the S Corporation Income Tax Return (Form SC1120S); there is no separate South Carolina S-corporation election. The corporate income tax rate applicable to South Carolina taxable income taxed at the S corporation level is 5% (e.g., net recognized built-in gains and excess net passive income).

>>> FLAG: 5% WITHHOLDING ON NONRESIDENT SHAREHOLDERS (§ 12-8-590) <<<

South Carolina taxes nonresident shareholders on their South Carolina-source pass-through income and requires the S corporation to address it. Absent an exception, the S corporation must estimate the South Carolina taxable income of each nonresident shareholder and pay 5% withholding tax on that amount, reported on Form SC1120S-WH.

The 5% withholding can generally be avoided in any of these ways:

• The nonresident shareholder files Form I-309 (Nonresident Shareholder or Partner Affidavit and Agreement) agreeing to be subject to South Carolina jurisdiction and to file/pay South Carolina income tax; or
• The S corporation files a composite return (SC1040 composite) and pays the tax on behalf of consenting nonresident shareholders; or
• The S corporation makes the Active Trade or Business PTE election (below), which removes the withholding requirement on nonresident members' active trade or business income.

Return / form

• The South Carolina S corporation files Form SC1120S (S Corporation Income Tax Return), with Schedule SC1120S K-1 to each shareholder.
• Due date: generally the 15th day of the 3rd month after the close of the tax year (following the federal S-corporation due date).
• Resident shareholders report their pro rata share of income on their South Carolina individual returns (SC1040).

>>> Optional Active Trade or Business pass-through entity (PTE) election (SALT-cap workaround) <<<

• South Carolina (S.B. 627, effective for tax years beginning after 2020; S.C. Code § 12-6-545(G)) lets partnerships, S corporations, and LLCs taxed as partnerships/S corporations elect to be taxed at the entity level on their active trade or business income at a flat 3% rate (apportioned to South Carolina), in lieu of that income passing through to qualified owners.
• The election is made annually at the entity level on Form I-435 (Active Trade or Business Income for Electing Partnerships and S Corporations), attached to Form SC1120S; the entity-level tax is reported on the SC1120S (entity-level withholding is also handled through SC1120S-WH where applicable). The election is generally due by the return's filing deadline including extensions.
• The election removes the nonresident-member withholding requirement for the electing PTE's active trade or business income. It does not apply to passive investment income or to capital gains, interest, or dividends, which still pass through and are taxed at the owner's regular rates.

Other South Carolina items to confirm

☐ File the Initial Annual Report of Corporations (CL-1) and pay the one-time $25 initial corporate license fee within 60 days of doing business or using capital in South Carolina; pay the annual corporate license fee thereafter.
☐ Maintain good standing with the SC Secretary of State; file the annual report with the SC1120S.
☐ Register with the SC Department of Employment and Workforce and for employer withholding before paying shareholder-employee wages.
☐ Register for Sales & Use Tax if selling taxable goods/services.

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 South Carolina income tax and FICA, file Forms 941/940, and file SC employer withholding and unemployment 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; South Carolina taxes built-in gains at the entity level at 5%.
☐ 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)). South Carolina taxes excess net passive income at the entity level at 5%.
☐ 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 SC Form SC1120S with SC1120S K-1s; address nonresident withholding (SC1120S-WH) or the I-435 PTE election.
☐ Recordkeeping. Retain Form 2553, the CP261 acceptance notice, shareholder consents, 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.

South Carolina effect

Because SC S status follows the federal election automatically, a federal revocation/termination ends SC S treatment for the same period; the entity then files as a C corporation on Form SC1120 and is subject to South Carolina's 5% corporate income tax (and the corporate license fee).

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)
• S.C. Code § 12-6-590 (taxation of S corporations); § 12-8-590 (nonresident shareholder/partner withholding); § 12-6-545(G) (active trade or business PTE election)
• SC Form SC1120S (S Corporation Income Tax Return); SC1120S-WH; Form I-309; Form I-435 (Active Trade or Business Income)
• South Carolina Department of Revenue — S Corporation — https://dor.sc.gov/business-income-taxes/corporate/s-corporation