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

S-CORPORATION ELECTION PACKAGE (FORM 2553 + WASHINGTON 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 Washington owner MUST read the state overlay first — the federal S election does NOT control Washington tax:

• Washington has no state corporate or personal income tax, so there is no separate Washington S election and no Washington income return to file based on S status. See Part 5.
• >>> CRITICAL: Washington taxes business activity through the Business & Occupation (B&O) tax — a GROSS-RECEIPTS tax under RCW Ch. 82.04 that applies at the ENTITY level regardless of S-corporation status, profit, or loss. Electing S status gives NO B&O relief. <<< See the FLAG in Part 5.
• The Washington capital gains tax (RCW Ch. 82.87) may reach shareholders on long-term gains above the annual threshold.

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.
• Washington note: the entity's federal classification does not change its Washington B&O treatment. An LLC, a C corporation, and an S corporation are all subject to the B&O tax on gross receipts the same way (see Part 5). The S election affects only federal income tax.

PART 5 — WASHINGTON STATE S-CORP OVERLAY

Recognition rule — no Washington income tax, so no separate Washington S election

Washington has no state corporate income tax and no state personal income tax. Because there is no state income tax to which Subchapter S applies, there is no separate Washington S-corporation election and no Washington income return keyed to S status. The federal S election simply has no Washington income-tax effect.

>>> FLAG: WASHINGTON B&O TAX APPLIES AT THE ENTITY LEVEL REGARDLESS OF S STATUS <<<

Washington's principal business tax is the Business & Occupation (B&O) tax — a GROSS-RECEIPTS tax imposed under RCW Ch. 82.04. It is measured on the value of products, gross proceeds of sales, or gross income of the business, with NO deduction for labor, materials, rent, or other costs of doing business.

• The B&O tax applies to the entity (the corporation or LLC) regardless of whether it has made a federal S election and regardless of profit or loss — a business with revenue can owe B&O tax even in a loss year. Electing S status provides no B&O relief.
• The rate varies by activity classification (e.g., retailing ≈ 0.471%, wholesaling ≈ 0.484%, manufacturing ≈ 0.484%, service & other activities at a higher rate — generally 1.5% to ~1.75% depending on gross income tier; a business with multiple activities reports under multiple classifications). [Verify current rates and tier breakpoints on the DOR B&O classification page, as rates are subject to legislative change.]
• B&O tax is reported and paid on the Combined Excise Tax Return (the same return used for retail sales tax), filed monthly, quarterly, or annually depending on the business's tax level.
• Nexus: both physical and economic nexus apply. An out-of-state S corporation with $100,000 or more in combined Washington gross receipts generally must register and pay B&O tax.
• Local B&O taxes: several cities (e.g., Seattle, Tacoma, Bellevue) impose their own separate municipal B&O taxes in addition to the state B&O tax.

Washington capital gains tax (RCW Ch. 82.87) — may reach shareholders

• Washington imposes a 7% tax on an individual's Washington long-term capital gains above an annual standard deduction/threshold (RCW Ch. 82.87). Although it is an individual-level tax (not an entity income tax), an S-corporation shareholder's long-term capital gains (e.g., on the sale of certain assets that flow through, or on a sale of the business) may be subject to it. [Verify the current threshold amount and any exemptions (e.g., real estate, certain qualifying business sales) before relying on this.]

No state S election, no state income return

☐ There is no Washington Form 2553 equivalent and no Washington S-corporation income return.
☐ Confirm the entity is registered with the Department of Revenue (and holds a Washington business license / UBI) for B&O and sales-tax reporting.
☐ File the Combined Excise Tax Return on the assigned filing frequency and pay B&O (and any retail sales tax) due.
☐ Register for city/municipal B&O where the business has a local presence (Seattle, Tacoma, Bellevue, etc.).
☐ Register with the Employment Security Department and L&I for unemployment insurance and workers' compensation before paying shareholder-employee wages.

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. (Note: Washington has no state income-tax withholding, but federal withholding, FICA, and Washington payroll/L&I obligations still apply.)
☐ Payroll setup. Run payroll, withhold and deposit federal income tax and FICA, file Forms 941/940, and file Washington Employment Security and L&I reports.
☐ 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 return + ongoing Washington excise filings. File Form 1120-S with Schedules K-1 federally; continue filing the Washington Combined Excise Tax Return and paying B&O tax on schedule (there is no Washington income return).
☐ 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.

Washington effect

Because Washington has no income tax, a federal S revocation/termination has no Washington income-tax consequence — the entity simply reverts to C-corporation treatment for federal purposes. The B&O tax (RCW Ch. 82.04) continues to apply unchanged before and after revocation, as it never depended on S status.

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)
• RCW Ch. 82.04 (Business and Occupation tax); RCW Ch. 82.87 (Washington capital gains tax)
• Washington Department of Revenue, B&O tax — https://dor.wa.gov/taxes-rates/business-occupation-tax
• Washington DOR, B&O tax classifications and rates — https://dor.wa.gov/taxes-rates/business-occupation-tax/business-occupation-tax-classifications
• Washington DOR, Combined Excise Tax Return — https://dor.wa.gov/file-pay-taxes