The average processing time for any paper-filed document ranges from 4-16 weeks.
If you have ever waited on the IRS to answer the phone you’ve experienced the speed of the IRS firsthand. It gets even worse for paper filed documents and tax returns! The average processing time for any paper filed document ranges from 4-16 weeks.
Over the past few years, we have seen an unprecedented number of customers where the IRS has yet to acknowledge their request to be an S-Corporation. The great news is there are safeguards and action steps we can take to guarantee the best tax treatment possible. The process can be summarized in 4 basic steps.
Step 1: File an electronic extension for your business tax return to test the IRS systems classification of your EIN
At the end of January, we filed an extension for your business tax return to help gauge where the IRS is in the process of your S-Corporation. For many customers who came to us in November and December, they are still working on the paperwork. Other customers who came earlier in the year have fallen subject to the IRS efficiencies. If the extension rejected from the IRS, we know we have more action steps to take.
Formations is going to refile the extension in the final week of February to confirm any new IRS acceptances of S-Elections. If the extension is accepted, this is great news and we can e-file your first 1120S S-Corporation tax return. If it rejects again, we will move on to the next steps to protect your business and tax filing status. We will also fill out a new 2553 and submit it to the IRS for good measure – who knows if the IRS lost the document.
Step 2: File paper extension form 7004 for your business, and 4868 for your personal tax return
Having documentation to prove our efforts is very important. As the IRS cannot electronically accept your extension until they have classified your EIN as an S-Corp, we will file a paper extension form 7004. The paper extension for your business will be sent via certified mail with tracking to prove your business has requested more time for the IRS to process your S-Election. The extension allows for 6 months to file the business return, with a new due date of September 15, 2021. If you need a copy of this extension, please reach out to your Customer Success Team and they will be able to provide it for you.
When we extend your personal tax return, it will also require your personal tax return. If you are working with a tax professional for your personal tax return – please send them a copy of this letter to ensure they are understanding the situation. They will file an extension for you when you make the request. For those of you who self-prepare your 1040 personal income tax return – you can download & print the extension request, fill it out, and mail it to the IRS. Alternatively, you can use the IRS free-file system and click file extension (button in the upper right) after you have created an account. Click here to access the free-file.
You are not able to file your personal tax return before your business return is filed –this step is very important to complete. Let us know if you have questions!
Step 3: Pay any balance due amounts to the IRS and State by their due date
An extension to file buys more time to have the IRS process the documents to be an S-Corporation, but there are no extensions for paying the IRS. For most taxpayers, their tax bill is due on April 15 to both federal and state agencies regardless of any extension. Some states, such as California have their franchise tax due on March 15 for the business.
You will want to work with your personal tax provider to give them figures for your w-2 and Net Income expectations from the business. We can provide these figures to your CPA or personal tax professional, just introduce your CSM to your CPA. They will be able to calculate your tax bill that should be paid by the important April 15 deadline.
Step 4: IRS acceptance of your S-Election and filing your business and personal tax returns
When the IRS accepts your S-election you will receive a letter to your business mailing address. Each IRS letter has a code in the upper corner and the acceptance letter is notice CP261 (pictured below). The letter will state the date that your S-Corp has become active. When you receive this letter please securely upload it to us. We are now able to file your 1120S S-Corporation tax return, provide you with your final K-1, and you can complete your personal tax filing. It may take into the late Spring or early Summer to receive this letter. We will ensure to follow up if we have not heard from you on progress. However, the IRS will not give us or you an update until the 2553 is accepted or rejected.
We are here to help! This may feel a bit overwhelming, but we are accustomed to this process.
FAQ
Why does it take so long to have the IRS accept S-Elections?
The IRS has yet to allow for 2553 S-Corp election to be electronically filed. Paper documents have to be manually processed by humans at one of the IRS processing centers. Paper tax documents received by the IRS take 4-16 weeks to process in normal years. With ongoing budget cuts, Covid, and human speed – the last year has created even longer delays in their process.
Do I need to file an S-Election with the State?
Every state has different rules for S-Corps. However, the only three states that require a unique S-election are Arkansas, New Jersey, and New York. The remaining states accept the federal election to be valid for the state level.
Can I file my personal return with estimated values?
You can not file your personal tax return with estimated values. You will need to wait until your business 1120S tax return is submitted to the IRS and state (if applicable). Estimated values are used for your personal tax preparer/CPA to calculate your tax due – but they can not be used to file 1040. When your business tax return is completed you will get a form K-1 which will be used to finalize your personal tax return.
Should I go on a payment plan with the IRS or State?
Payment plans are a great way to stay in compliance with the IRS and state. However, the recommendation is to always pay all your tax by the due date. Any amounts that remain unpaid – even if you are on a payment plan – incur both interest and penalties. Payment plans are set up as a part of your personal tax return where the tax is determined and owed.
Does this give me more time to do profit-sharing retirement?
Having an extension to file your business return also allows you more time to complete your profit sharing to a Solo 401k or SEP-IRA. This means you can have more time to still enjoy tax savings. If you would like to know more about retirement options, please see our videos: Last-Minute Profit Sharing [Click here] and our favorite S-Corp Retirement Program the Solo 401k [click here].
Am I in trouble if I file a late s-election, won’t the IRS question my business?
Not at all. The IRS has designed a special Revenue Procedure 2013-30 to detail the process of how to file a late S-Election. You can read more about it on their website [Click Here]. In the same way that extensions are designed by the IRS to help customers and can not have negative consequences, the same applies for late S-Elections.
What if I need my return now for a mortgage or refinance?
99% of the time, your mortgage lender or refinance provider will accept copies of your extensions filled with the IRS. This is a normal process that should involve giving your lender the 7004 S-Corp Extension and 4868 Personal Extension. We can provide you a copy of the 7004 for your business and your personal tax professional can provide you with the personal 4686 extensions.
What if I get a notice from the IRS or State?
Don’t panic. We are here to help you through any IRS and state notices regarding your business. Many notices are very easy to resolve by professionals like us. Also, be on the lookout for possible fraud and marketing schemes. Being a business owner, you are a target for bad players to try and exploit. Anytime you get a notice, demand, or other documents that seem to be official – securely upload a copy to us ASAP to let us help you navigate the process.
How do I know when my S-Election is accepted?
The IRS will mail you a CP261 letter that officially states, “You will be treated as an S Corporation” and a starting date. The letter is confirmation you are now the best tax structure for your business. When you receive this letter, upload a copy so that we can proceed with the next steps and get your tax returns filed!