If you are planning to establish a legal business entity (ex: Limited Liability Company (LLC) or Corporation) or have an existing legal business entity in New York and are considering a sub-chapter S election, there are a few things you’ll want to keep in mind.
First, it’s important to understand that single-member LLCs (defaultly treated as a disregarded entity and taxed like a sole proprietorship for tax purposes), multi-member LLCs (defaultly treated as a Partnership) and Corporations making a sub-chapter S election are all considered pass-through entities for federal tax purposes. This means that the entities themselves are generally not subject to income taxes. Profit/loss from the business is passed through to the individual members (LLCs) or shareholders (S-Corps), generally reported on a Schedule K-1 for Partnerships & S Corps, and each member or shareholder reports and pays their respective share of income taxes on their respective share of profit/loss on their individual tax returns.
Eligible single-member LLCs, multi-member LLCs (Partnerships) and corporations (C-Corps) can elect to be treated as sub-chapter S for federal tax purposes in lieu of their default classification. There are various pros and cons associated with making a S election, so it is best to consult with your Accountant, CPA Firm and/or legal counsel so that you may make a well-informed decision.
At the federal level, to make a sub-chapter S election, eligible LLCs will need to file both Form 8832 – Entity Classification Election and Form 2553 – Election By A Small Business Corporation. Eligible corporations (C-Corps) will need to file Form 2553 – Election By A Small Business Corporation. When filing Form 8832, keep in mind that the election may take effect no more than 75 days prior to the date the election is filed or no later than 12 months after the election is filed. When filing Form 2553, keep in mind that the form must be filed no more than 2 months and 15 days after the beginning of the tax year for which the election shall take effect or any time during the tax year preceding the tax year for which the election shall take effect. Both forms do allow “Relief for Late Elections.” Eligibility information is available in the instructions for each form. Your Accountant or CPA Firm should be able to help prepare the necessary forms for you to sign and send to the IRS. The IRS should provide written notice as to the acceptance or rejection of the filing(s) within 60 days of receipt.
At the state level, things start to get complicated. While many states recognize the federal S election at the state level, New York State does not. By default, New York State will treat your entity as a C Corporation for tax purposes even if you have made a federal S election. In order for your entity to be recognized and taxed as a S Corporation at the state level, you must file New York State’s Form CT-6 – Election by a Federal S Corporation to be Treated As a New York S Corporation. Again, your Accountant or CPA Firm should be able to help prepare the necessary form for you to sign and send to the New York State Department of Taxation & Finance (NYS DTF). The NYS DTF should provide written notice as to the acceptance or rejection of the filing within 60 days of receipt. While filing Form CT-6 will allow your entity to be treated as a New York S Corporation for tax purposes, New York State requires most general business corporations to pay a franchise tax at the entity level under Article 9-A of New York law.
One last complication is at the city level. New York City does not recognize the federal S or New York State S elections. Therefore, S Corporations are subject to New York City’s General Corporation Tax (GCT) and will be required to pay this tax at the entity level.
If you are planning to make a S election for your business, be sure to seek and consult with professional counsel (ex: Accountant, CPA Firm) to understand the pros and cons as well as the administrative requirements and tax implications at the federal, state and local levels. As you can see in the case of New York, there are a couple of added complexities at the state and local level that you’ll want to be aware of. A good Accountant or CPA Firm should stay ahead of the game and keep you well-informed but don’t hesitate to ask your Accountant or CPA Firm directly about how the S election works within your state and local levels.