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

S-CORPORATION ELECTION PACKAGE (FORM 2553 + TENNESSEE 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 Tennessee owner MUST read the state overlay first — the federal S election gives NO Tennessee tax benefit:

• >>> CRITICAL: Tennessee does NOT grant S corporations pass-through treatment. <<< Tennessee's Franchise & Excise (F&E) tax applies at the entity level regardless of S status. The federal S election produces no Tennessee F&E benefit whatsoever. See the FLAG in Part 5.
• The excise tax is 6.5% of net earnings (Tenn. Code Ann. § 67-4-2007) and the franchise tax is 25¢ per $100 (0.25%) of net worth (Tenn. Code Ann. § 67-4-2106), each owed by the S corporation directly.
• Tennessee has no separate state S election to make. (The former Hall income tax on interest and dividends was fully repealed effective tax years beginning January 1, 2021, so individual Tennessee shareholders no longer pay Hall tax on pass-through dividends.)

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.
• Tennessee note: Tennessee's F&E tax reaches most limited liability entities, not just entities taxed as corporations. An LLC — even one disregarded for federal purposes — is generally regarded and subject to F&E tax for Tennessee purposes, with a narrow exception only for an LLC whose single member is a corporation and that is disregarded federally (Tenn. Code Ann. § 67-4-2007(d)). Electing S status does not remove an LLC from the F&E tax base.

PART 5 — TENNESSEE STATE S-CORP OVERLAY

Recognition rule — TENNESSEE DOES NOT RECOGNIZE S-CORP PASS-THROUGH TREATMENT

Tennessee has no separate state S election and grants the federal S corporation no pass-through benefit for its principal business taxes. Tennessee's definition of "person" subject to the Franchise & Excise tax expressly includes a "subchapter S corporation" (Tenn. Code Ann. § 67-4-2004). An S corporation is therefore taxed at the entity level in Tennessee in the same manner as any other taxable corporation.

>>> FLAG: TENNESSEE TAXES S CORPORATIONS AT THE ENTITY LEVEL (NO S BENEFIT) <<<

A Tennessee S corporation pays BOTH of the following at the entity level, regardless of its federal S status:

• EXCISE TAX — 6.5% of net earnings (apportioned Tennessee net income) for the year (Tenn. Code Ann. § 67-4-2007(a)); AND
• FRANCHISE TAX — 25¢ per $100 (0.25%) of net worth (the apportioned net worth base) (Tenn. Code Ann. § 67-4-2106(a)).

There is a minimum franchise tax of $100. Both taxes are imposed on the S corporation itself; the federal S election does NOT reduce, eliminate, or alter the Tennessee F&E liability. A Tennessee owner contemplating S status should not expect the state-level savings available in true pass-through states.

• Example: net earnings of $200,000 → excise tax of $13,000 (6.5%), in addition to franchise tax of 0.25% of net worth.
• The taxes apply even in a loss year to the extent of net worth (the franchise tax has a $100 floor).

Hall income tax — REPEALED

Tennessee's former Hall income tax on interest and dividends has been fully repealed effective for tax years beginning on or after January 1, 2021. Individual Tennessee shareholders no longer owe Hall tax on dividends or pass-through income. Tennessee imposes no broad personal income tax on wages or pass-through earnings.

Return / form and registration

• The S corporation files the Tennessee Franchise and Excise Tax Return, Form FAE 170 (combined franchise + excise), through the Tennessee Taxpayer Access Point (TNTAP).
• Due date: the 15th day of the 4th month after the close of the tax year (April 15 for calendar-year filers), conforming to the federal due date.
• Quarterly estimated F&E payments are required when the combined tax is expected to exceed the statutory threshold.
• Register the entity for F&E (and any applicable business tax / sales-and-use tax) accounts with the Tennessee Department of Revenue, and maintain good standing with the Tennessee Secretary of State (file the annual report).

Tennessee business tax / local taxes (confirm)

☐ Determine whether the entity owes the Tennessee business tax (a gross-receipts privilege tax administered by the Department of Revenue, generally applicable above the statutory receipts threshold) and register with the appropriate county/municipal clerk.
☐ Register for sales and use tax if selling taxable goods or 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 income tax and FICA, file Forms 941/940, and register for Tennessee unemployment insurance with the Department of Labor & Workforce Development. (Tennessee has no state wage-income withholding because there is no broad personal income tax.)
☐ Distributions. Distributions to shareholders are generally tax-free for federal purposes 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.
☐ 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 federal 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 Tennessee Form FAE 170 (franchise & excise) at the entity level — paying the 6.5% excise tax and 0.25% franchise tax regardless of S status.
☐ 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.

Tennessee effect

A federal revocation or termination has no effect on the Tennessee Franchise & Excise tax: because Tennessee already taxes the S corporation at the entity level, the entity continues to file Form FAE 170 and pay the 6.5% excise and 0.25% franchise taxes as a C corporation would. There is no change in Tennessee filing status and no separate Tennessee S election to revoke.

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)
• Tenn. Code Ann. § 67-4-2004 (definition of "person" — includes Subchapter S corporation)
• Tenn. Code Ann. § 67-4-2007 (excise tax — 6.5% of net earnings); § 67-4-2105 (franchise tax imposition); § 67-4-2106 (franchise tax rate — 25¢ per $100 of net worth)
• Tennessee Department of Revenue, Franchise & Excise Tax — https://www.tn.gov/revenue/taxes/franchise---excise-tax.html
• Tennessee Department of Revenue, Form FAE 170 and TNTAP — https://www.tn.gov/revenue/
• Hall income tax repeal (Pub. Acts 2016, ch. 1085; fully repealed for tax years beginning on or after Jan. 1, 2021)