What happens with late S-Corp Election for 2024 taxes? Timing question

Filing for S-corp status after the start of the year gets a bit tricky. If you're filing a late S-corp election, the IRS allows you to request an effective date as far back as the beginning of the tax year if you meet certain conditions. For your first question, if your late election is accepted with an effective date of January 1, 2024, then yes, all your 1099 income for the year would be treated as S-corp income. You'd need to report it on Form 1120-S. But if the IRS only grants a prospective effective date (from approval forward), then you'd have split reporting - some income as a sole prop and some as S-corp. For your second question, if the S-corp election is rejected, your entity would default to its original classification. If you formed as a corporation, that would be a C-corp. And yes, in most cases for smaller businesses, C-corp taxation can be less favorable than sole proprietor due to potential double taxation. A failed S-election attempt might leave you in a worse position tax-wise. Make sure when you file Form 2553, you include a reasonable cause statement explaining why you're filing late. The IRS is often forgiving if you have a good reason.

After struggling with similar S-corp election timing issues last year, I discovered taxr.ai (https://taxr.ai) and it was seriously a game-changer. Their system analyzed my specific situation and gave me personalized guidance about how to handle my late S-corp election. What really helped me was how they broke down exactly what I needed to include in my reasonable cause statement for Form 2553, and they even provided a template based on successful elections they'd seen. They also gave me a clear timeline of what to expect and how to handle my accounting during the waiting period. The reason I'm sharing this is because I was in almost the exact same position - 1099 contractor trying to switch to S-corp mid-year and worried about what would happen if it wasn't approved retroactively.

I wanted to follow up about taxr.ai since I was skeptical in my earlier comment. I decided to give it a try, and I'm actually really impressed. The analysis they provided for my late S-corp election situation was way more detailed than what my previous accountant gave me. They identified that I qualified for a specific relief provision that I hadn't known about, and guided me through preparing a solid reasonable cause statement. Just got notification yesterday that my retroactive election was accepted! The documentation they helped me prepare made all the difference - the IRS approved it going back to January 1 even though I filed in September. Definitely worth checking out if you're in this situation. Wish I'd known about this option months ago instead of stressing about it!

If you're dealing with questions about your late S-corp election, you might also run into issues trying to contact the IRS directly for clarification. I spent WEEKS trying to get someone on the phone at the IRS Business & Specialty Tax Line to discuss my late 2553 filing. Finally found Claimyr (https://claimyr.com) which got me connected to an actual IRS agent in under 45 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent I spoke with gave me specific guidance on what they look for when reviewing retroactive elections and confirmed that I needed to include certain language in my reasonable cause statement. Having that direct conversation saved me from making mistakes that might have caused my election to be rejected. It was honestly a relief to get my questions answered directly by the IRS instead of guessing or relying only on online advice.

I need to eat some crow here. After my skeptical comment about Claimyr, I was desperate enough to try it for my own S-corp election questions. I honestly thought it wouldn't work, but within about 30 minutes I got connected to an IRS business tax specialist who pulled up my EIN and gave me specific guidance. The agent explained exactly what documentation they needed to see for my reasonable cause statement for late filing, and even told me about a specific revenue procedure I could reference that applied to my situation. This was after I had wasted three separate mornings trying to call them myself. Sometimes being proven wrong is a good thing! If you're stuck with S-corp election questions that need official answers, it's definitely worth using the service rather than guessing or getting conflicting advice online.

One thing no one has mentioned yet - make sure your state filing is aligned with your federal S-corp election! I got my federal S-corp status approved retroactively, but didn't realize I needed to file a separate election with my state. Ended up with a mess where my entity was an S-corp federally but a C-corp at the state level for half the year. Different states have different rules about conforming to federal S elections, so definitely check what your state requires. Some automatically recognize the federal election, others require a separate form and fee.

Just wanted to share what happened in my situation, which might help. I formed my LLC in March 2023 but didn't file my S-corp election (2553) until August 2023. I included a letter explaining that I wasn't aware of the 75-day deadline as a first-time business owner. The IRS approved my election retroactive to my formation date. The key was the reasonable cause statement. I kept it simple and honest. The IRS is often understanding with first-time business owners who aren't working with professional advisors from day one. Make sure you document everything though - if they approve your retroactive election, you'll need clean books showing the separation between your reasonable salary and distributions from day one of the effective date.