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

S-CORPORATION ELECTION PACKAGE (FORM 2553 + WISCONSIN 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 Wisconsin owner MUST read the state overlay first — Wisconsin has a unique "tax-option" regime with an opt-OUT:

• A federal S corporation is automatically a Wisconsin "tax-option (S) corporation" (Wis. Stat. § 71.34) — there is no affirmative Wisconsin S election to make. See Part 5.
• >>> FLAG: Shareholders holding MORE THAN 50% of the shares may elect OUT of Wisconsin tax-option treatment under Wis. Stat. § 71.365(4)(a). If they do, the corporation is taxed as a C corporation for WISCONSIN purposes (7.9% corporate income/franchise tax) even though it remains an S corporation for federal purposes. The opt-out is irrevocable for 5 years. <<< See the FLAG in Part 5.
• The Wisconsin tax-option (S) corporation files Form 5S and may make a separate entity-level pass-through (PTE) tax election (7.9%) under Wis. Stat. § 71.365(4m)(a).

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.
• Wisconsin note: an LLC with a valid federal S election is a Wisconsin tax-option (S) corporation and files Form 5S (and may itself opt out under § 71.365(4)(a) or make the entity-level election under § 71.365(4m)(a) — see Part 5). Wisconsin follows the federal classification unless the opt-out is made.

PART 5 — WISCONSIN STATE S-CORP OVERLAY

Recognition rule — AUTOMATIC "tax-option (S) corporation" (no affirmative Wisconsin election)

Under Wis. Stat. § 71.34, any corporation that has a valid federal S election is automatically treated as a Wisconsin "tax-option (S) corporation" for state purposes. There is no affirmative Wisconsin S election to make — the federal election controls by default. As a tax-option corporation, the entity generally passes income through to shareholders, who report it on their Wisconsin individual returns (items flow via Schedule 5K-1).

>>> FLAG: WISCONSIN OPT-OUT — ELECTING OUT OF TAX-OPTION (S) STATUS (Wis. Stat. § 71.365(4)(a)) <<<

This is the key Wisconsin variation. Shareholders who hold more than 50% of the shares on the day the election is made may elect OUT of Wisconsin tax-option treatment under Wis. Stat. § 71.365(4)(a).

• If the opt-out is made, the corporation is taxed as a C corporation for WISCONSIN purposes — it pays the Wisconsin corporate income/franchise tax (7.9%) at the entity level — even though it remains an S corporation for FEDERAL purposes. Federal Subchapter S treatment continues unaffected.
• The opt-out is generally irrevocable for 5 years and is used in narrow planning scenarios (e.g., where keeping corporate-level Wisconsin loss carryforwards or other state attributes at the entity level is advantageous).
• Most owners should NOT opt out — it forfeits Wisconsin pass-through treatment and re-creates state-level double taxation. Confirm whether opting out is intended before relying on it.

Return / form — Form 5S

• A Wisconsin tax-option (S) corporation files Form 5S (Wisconsin Tax-Option (S) Corporation Franchise or Income Tax Return), with Schedule 5K-1 issued to each shareholder.
• Due date: the 15th day of the 3rd month after the close of the tax year (March 15 for calendar-year filers).
• Note the Wisconsin economic development surcharge (Wis. Stat. § 77.92 et seq.) may apply to tax-option corporations meeting the gross-receipts threshold; confirm current applicability and minimum amount.

Entity-level pass-through (PTE) tax election (Wis. Stat. § 71.365(4m)(a)) — distinct from the opt-out

• Separate from the § 71.365(4)(a) opt-out, a tax-option (S) corporation may make an annual entity-level tax election under Wis. Stat. § 71.365(4m)(a) (enacted by 2017 Wisconsin Act 368, a federal SALT-cap workaround). Shareholders holding more than 50% of the shares must consent to this election.
• If made, the corporation's Wisconsin net income is taxed at the entity level at a flat 7.9% (the Wisconsin corporate rate), and that income is excluded from the shareholders' Wisconsin taxable income (basis is still adjusted as if no election were made). This makes the state tax deductible at the entity level for federal purposes.
• This entity-level PTE election (§ 71.365(4m)) keeps the corporation an S corporation for Wisconsin; the opt-out (§ 71.365(4)) instead turns it into a Wisconsin C corporation. Do not confuse the two.
• [Verify the current PTE-tax rate, the consent/election mechanics on Form 5S, and any later amendments before relying on this election.]

Other Wisconsin items to confirm

☐ Maintain good standing with the Wisconsin Department of Financial Institutions (DFI) and file the annual report.
☐ Register with the Wisconsin Department of Revenue for withholding and with the Department of Workforce Development for unemployment insurance before paying shareholder-employee wages.
☐ Register for Wisconsin 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 Wisconsin income tax and FICA, file Forms 941/940, and file Wisconsin employer withholding returns (Form WT-7 / WT-6).
☐ 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 (and Wisconsin computes its own built-in gains tax for tax-option corporations).
☐ 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 Wisconsin Form 5S with Schedule 5K-1 for each shareholder; pay the economic development surcharge if applicable; pay entity-level tax if the § 71.365(4m) PTE election is made.
☐ Recordkeeping. Retain Form 2553, the CP261 acceptance notice, shareholder consents, any Wisconsin opt-out or PTE-election documentation, 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.

Wisconsin effect

Wisconsin tax-option (S) status follows the federal classification. A federal revocation/termination ends Wisconsin tax-option treatment for the same period; the entity then files as a C corporation on Wisconsin Form 4 (or Form 6 for a combined group) and pays the 7.9% Wisconsin corporate income/franchise tax instead of filing Form 5S. (This is distinct from the Wisconsin § 71.365(4)(a) opt-out, which produces the same Wisconsin C-corporation result while the federal S election remains in place.)

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)
• Wis. Stat. § 71.34 (tax-option (S) corporations); § 71.365(4)(a) (opt-out of tax-option status); § 71.365(4m)(a) (entity-level PTE tax election — 7.9%)
• Wisconsin DOR Publication 102, Wisconsin Tax Treatment of Tax-Option (S) Corporations and Their Shareholders — https://www.revenue.wi.gov/DOR%20Publications/pb102.pdf
• Wisconsin DOR, Form 5S and Schedule 5K-1 — https://www.revenue.wi.gov/Pages/Form/2024Corp.aspx