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

S-CORPORATION ELECTION PACKAGE (FORM 2553 + VIRGINIA 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 Virginia owner should read the state overlay:

• Virginia recognizes the federal S election automatically — there is no separate Virginia S election. See Part 5.
• Virginia is a true pass-through state for S corporations: there is no entity-level income tax on the S corporation itself (other than the optional PTET below). The S corporation files an informational/withholding return on Form 502 (or Form 502PTET if it elects the PTE tax).
• The S corporation must withhold Virginia income tax on the Virginia-source income of nonresident shareholders (Va. Code § 58.1-486.2).

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.
• Virginia note: an LLC taxed as an S corporation is a pass-through entity for Virginia purposes and files the same Form 502 (or Form 502PTET) as any other S corporation. It is not subject to a separate Virginia entity-level income tax merely because it is an LLC.

PART 5 — VIRGINIA STATE S-CORP OVERLAY

Recognition rule — AUTOMATIC (no separate Virginia election)

Virginia conforms to the federal S election. A corporation (or LLC) that has a valid federal S election is treated as an S corporation / pass-through entity for Virginia purposes automatically — there is no separate Virginia S-corporation election form. The federal classification governs the Virginia classification.

No entity-level income tax — Virginia is a true pass-through state

Unlike California or some other states, Virginia does not impose an entity-level franchise/income tax on the S corporation's net income, and there is no Virginia equivalent of an $800 minimum. Income, gain, loss, deduction, and credit pass through to the shareholders, who report their Virginia-source shares on their individual returns (S corporation items flow to shareholders via Schedule VK-1).

Return / form — Form 502 (or Form 502PTET)

• A pass-through entity that does business in Virginia or receives Virginia-source income files the Virginia Pass-Through Entity Return of Income and Return of Nonresident Withholding Tax — Form 502 (Va. Code § 58.1-390.1 et seq.).
• Due date: the 15th day of the 4th month after the close of the tax year (April 15 for calendar-year filers). An automatic 6-month filing extension applies (no application required) — but the extension does not extend the time to pay nonresident withholding tax.
• Late-filing penalty: if Form 502 is filed after the extended due date, the maximum $1,200 late-filing penalty applies.

Nonresident withholding (Va. Code § 58.1-486.2)

• The S corporation must withhold Virginia income tax at 5% of each nonresident shareholder's share of Virginia-source taxable income and remit it with the return.
• Use Form 502W to make the withholding payment by the return due date (the payment due date is not extended by the filing extension).
• Withholding may be reduced/eliminated for owners who file the required nonresident statements or where exceptions apply; confirm current thresholds.

Optional pass-through entity (PTE) elective tax — Va. Code § 58.1-390.3 (SALT-cap workaround)

• A qualifying PTE (one owned 100% by natural persons or, for an S corporation, 100% by persons eligible to be S-corporation shareholders) may make an annual election to pay Virginia income tax at the entity level at a 5.75% rate on the Virginia taxable income attributable to eligible owners. Eligible owners receive a refundable credit for their share.
• The election is available for taxable years beginning on or after January 1, 2021, and before January 1, 2027 (current statutory sunset — [verify whether the General Assembly has extended the sunset]).
• Electing PTEs file Form 502PTET (filed electronically); the PTET return filing is a binding election for the year, and an owner cannot individually opt out once the PTE elects. This 5.75% PTET is a federal SALT-cap workaround under IRS Notice 2020-75 — confirm current election/payment mechanics before relying on it.

Other Virginia items to confirm

☐ Maintain good standing with the Virginia State Corporation Commission (SCC) and pay the annual registration fee.
☐ Register with Virginia Tax for an employer withholding account and with the Virginia Employment Commission (VEC) before paying shareholder-employee wages.
☐ Register for Virginia retail sales and 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 Virginia income tax and FICA, file Forms 941/940, and file Virginia employer 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 for federal purposes.
☐ 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 Virginia Form 502 (or Form 502PTET if electing) with Schedule VK-1 for each shareholder; remit nonresident withholding under § 58.1-486.2.
☐ 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.

Virginia effect

Virginia S/pass-through treatment follows the federal classification. A federal revocation/termination ends Virginia S treatment for the same period; the entity then files as a C corporation on Virginia Form 500 and is subject to the 6% Virginia corporate income tax instead of pass-through reporting on Form 502.

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)
• Va. Code § 58.1-390.1 et seq. (pass-through entity return); § 58.1-486.2 (nonresident withholding); § 58.1-390.3 (elective PTE tax — 5.75%)
• Virginia Tax, Pass-Through Entities — https://www.tax.virginia.gov/pass-through-entities
• Virginia Tax, Form 502 / Form 502PTET / Form 502W / Schedule VK-1 — https://www.tax.virginia.gov/forms