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

S-CORPORATION ELECTION PACKAGE (FORM 2553 + VERMONT 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.

What a Vermont owner should know up front:

• Vermont recognizes the federal S election; the S corporation is treated as a pass-through entity and files the Business Income Tax Return, Form BI-471. See Part 5.
• >>> CRITICAL: Vermont imposes a $250 MINIMUM ENTITY TAX on S corporations and other pass-through entities, payable with the return every year (32 V.S.A. § 5832). <<< See the FLAG in Part 5.
• A Vermont S corporation must make nonresident withholding / estimated payments (Form WH-435) for its nonresident owners, may be required to file a composite return, and may make an optional pass-through entity (PTE) "SALT cap" election (S.45, 2023; 32 V.S.A. ch. 151, subch. 10C).

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.
• Vermont note: an LLC taxed as an S corporation is a "pass-through entity" subject to the Vermont Business Income Tax (Form BI-471), the $250 minimum entity tax, and the nonresident withholding/composite rules — the same as any other Vermont S corporation.

PART 5 — VERMONT STATE S-CORP OVERLAY

Recognition rule — VERMONT RECOGNIZES THE FEDERAL S ELECTION

Vermont conforms to the federal S election. A federal S corporation is treated as a pass-through entity for Vermont purposes; its Vermont-attributable income passes through to the shareholders and is taxed at the shareholder level on their Vermont individual returns (32 V.S.A. § 5914). There is no separate Vermont S-election form — the federal Form 2553 controls — but the S corporation must register with the Vermont Department of Taxes and file the Business Income Tax Return, Form BI-471.

>>> FLAG: VERMONT $250 MINIMUM ENTITY TAX <<<

A Vermont S corporation (and every other pass-through entity) is liable for a $250 minimum annual entity tax for each taxable year, payable with the return (32 V.S.A. § 5832; Form BI-471 instructions). The $250 minimum is owed every year — including a loss or short-period year — and is paid by the entity itself. (A narrow exception sets a $75 minimum for a qualifying small farm corporation under 32 V.S.A. § 5832(2)(A).)

Return / form and due date

• The S corporation files Form BI-471, Business Income Tax Return, with the Vermont Department of Taxes (via myVTax or paper). An entity owned exclusively by Vermont residents with only Vermont income may instead file the simplified Form BI-476.
• Supporting schedules include Schedule BI-472 (non-composite), Schedule BI-473 (composite), and Schedule K-1VT for each shareholder.
• Due date: the date prescribed for filing under the Internal Revenue Code (generally the 15th day of the 3rd month after the close of the tax year — March 15 for a calendar-year S corporation). A federal extension extends the Vermont filing date by 30 days beyond the federal extension, but the $250 minimum tax is due on the original due date.

Nonresident withholding and composite filing

• The entity must make estimated income tax payments on behalf of nonresident shareholders for Vermont-source income, using Form WH-435 (due the 15th day of the 4th, 6th, and 9th months of the tax year and the 1st month of the following year — generally April 15, June 15, September 15, and January 15 for calendar-year filers). The entity cannot delegate the WH-435 obligation to the nonresident owner.
• The entity may elect to file a composite return (Schedule BI-473) and pay tax at the entity level for nonresident owners. Composite filing is mandatory for pass-through entities with more than 50 nonresident shareholders, partners, or members. Owners included in a composite return are relieved of filing their own Vermont return absent other Vermont activity.

Optional pass-through entity (PTE) "SALT cap" election (S.45, 2023)

• Vermont enacted an elective pass-through entity income tax as a federal SALT-deduction-cap workaround (S.45, effective for tax years beginning on or after January 1, 2023; 32 V.S.A. ch. 151, subch. 10C). An eligible pass-through entity (one made up entirely of individuals — no C corporations) may elect to pay Vermont tax at the entity level on its distributive proceeds derived from or connected with Vermont sources at the second-highest marginal individual rate (7.6%) under 32 V.S.A. § 5822, with a corresponding credit to the electing owners. Consult a tax advisor and confirm current rate, mechanics, and any post-2025 federal-law effect before relying on it.

Other Vermont items to confirm

☐ Maintain good standing and file the annual report with the Vermont Secretary of State.
☐ Register for Vermont withholding and unemployment insurance accounts before paying shareholder-employee wages.
☐ 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 and Vermont income tax and FICA, file Forms 941/940, and file Vermont withholding returns (Form WHT series).
☐ 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 Vermont Form BI-471 with Schedules K-1VT, paying the $250 minimum entity tax and any nonresident withholding (WH-435) / composite or elective PTE tax.
☐ 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.

Vermont effect

Vermont S treatment follows the federal classification. A federal revocation or termination ends Vermont S/pass-through treatment for the same period; the entity then files as a C corporation on Form CO-411 and is subject to the Vermont corporate income tax (graduated marginal rates) and the corporate minimum tax (a graduated minimum tax tied to Vermont gross receipts, ranging from $100 upward, in lieu of the $250 pass-through minimum) under 32 V.S.A. § 5832.

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)
• 32 V.S.A. § 5832 (minimum corporate/entity tax — $250; small farm corporation $75); § 5862 (pass-through returns); § 5914 (S corporation income taxed to shareholders)
• 32 V.S.A. ch. 151, subch. 10C; S.45 (2023) (elective pass-through entity income tax — 7.6%)
• Vermont Department of Taxes, Business Entity Income Tax — https://tax.vermont.gov/business/business-entity-income-tax
• Vermont Department of Taxes, Corporate Income Tax (minimum tax schedule) — https://tax.vermont.gov/business/corporate-income-tax
• Vermont Department of Taxes, Form BI-471 and Instructions; Form WH-435; myVTax — https://tax.vermont.gov/