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6 • 2017

A Comprehensive Guide to State S Election Requirements

Shareholders of small business corporations that meet certain criteria may elect to have the business be treated as an “S corporation” and receive favorable federal “pass-through” tax treatment to avoid double taxation on income, once at the corporate level and again at the shareholder level.[1] The federal S corporation election is made by filing Form 2553 (Election by a Small Business Corporation) with the Internal Revenue Service.[2] Almost every state and other jurisdiction in the country recognizes the federal S corporation election, and a separate state S corporation election is not required. However, a few states require S corporations to file separate elections, or something else, for the federal S corporation election to be recognized in those states.[3]

Separate Election Form

The number of states that actually require something specifically delineated as a separate S corporation “election” seems to now be down to only two—New Jersey and New York—although there is some uncertainty in a few other states:

Arkansas used to require the filing of a separate Form 1103 for federal S corporations to be recognized in Arkansas. But effective August 1, 2017, the law has been changed and Arkansas now recognizes a federal S corporation election without a separate state election.[4]

The law in Mississippi on the requirement of a separate election form is unclear. A Mississippi Department of Revenue regulation specifically states that

[a]n S corporation having made a valid election for Federal income tax purposes must make a similar election for Mississippi income tax purposes. The granting of the election for Mississippi purposes is contingent upon the granting and approval of the election for Federal purposes. Such election shall be filed with the State Tax Commission within 60 days of the date filed for Federal purposes. The prescribed form shall contain, in addition to any required information, a consent statement from each shareholder of the corporation.[5]

But there does not appear to be a “prescribed form” for electing state S corporation status on the section of the Department of Revenue’s website collecting the state’s “pass-through entity” forms.[6] And the instructions for completing Mississippi Form 84-105 (Mississippi Pass-Through Entity Tax Return), define an “S corporation” as “a corporation for which a valid election under section 1372(a) of the Internal Revenue Code is in effect,” without reference to any separate filing under Mississippi law.[7] The instructions then state, again without reference to any separate filing requirement, that

[a] corporation must file Form 84-105 if (a) it elected to be an S corporation by filing Federal Form 2553, (b) the IRS accepted the election, and (c) the election remains in effect. Do not file Form 84-105 until the corporation has been notified by the IRS that the federal election has been accepted.[8]

As such, it is not clear that there is a separate form that must be filed to elect S corporation status in Mississippi.

Similar to Mississippi, Ohio has a law requiring that a corporation that makes a federal S corporation election “shall file a notice of such election with the tax commissioner between the first day of January and the thirty-first day of March of each tax year that the election is in effect.”[9] The election used to be filed in Ohio on Form FT 1120S, but the requirement was waived for tax years 2010 through 2013, and has since seemed to be done away with altogether, even though the quoted statute has not been repealed.[10]

New Jersey requires a corporation to file a separate election to be a “New Jersey S corporation.”[11] The state election is made on Form CBT-2553 (New Jersey S Corporation or New Jersey QSSS Election).[12]

New York also requires a corporation to file a separate election to be a “New York S corporation.”[13] The state election is made on Form CT-6 (Election by a Federal S Corporation to be Treated as a New York S Corporation).

Something Else

Georgia generally recognizes the federal S corporation election, and a separate state “election” is not required. However, the federal S corporation election will be recognized for Georgia purposes only if any nonresident shareholders in the corporation file an agreement on Form 600S-CA (Consent Agreement of Nonresident Shareholders of S Corporations) whereby the shareholders consent to pay Georgia income tax on their proportionate part of the corporation’s Georgia taxable income.[14] If the consent agreements are not executed, “the s-corporation election will be terminated.”[15]

As indicated, Mississippi may or may not require a separate state S corporation election form. Like Georgia, however, Mississippi definitely does require any nonresident shareholder of a Mississippi S corporation to file an agreement on Form 84-380 (Non-Resident Income Tax Agreement) to (1) timely pay all taxes imposed on the shareholder by Mississippi with respect to the S corporation’s taxable income, and (2) be subject to personal jurisdiction in Mississippi for purposes of collecting the income taxes.[16]

Pennsylvania and Wisconsin both recognize federal S corporation elections, and do not require a separate state election. In both states, however, a corporation can opt out and elect to be taxed like a regular business corporation rather than an S corporation.[17] In Pennsylvania, the election is made on Form REV-976 (Election Not to Be Taxed as a Pennsylvania S Corporation), and in Wisconsin, on Form 5E (Election by an S Corporation Not to Be Treated as a Tax-Option Corporation).

Finally, Utah recognizes federal S corporation elections, and does not require a separate state election. However, the instructions to Form TC-20S, the Utah S corporation tax return form, state that a copy of the IRS letter of authorization (Notice of Acceptance as an S Corporation) must be attached to the Form TC-20S the first time the corporation files such a return.[18] New York similarly requires that a copy of the federal approval be provided to the Tax Department.[19]

[1] See 26 U.S.C. § 1361.

[2] See 26 C.F.R. § 1.1362-6.

[3] This article focuses only on those states that require a separate election or something else to be filed for the federal election to be recognized. Some jurisdictions—the District of Columbia, Louisiana, New Hampshire, New York City, Tennessee, and Texas—do not recognize the federal S corporation election and, for the most part, tax S corporations like other business corporations. The issue also does not arise in those states, including Washington and Wyoming, which do not impose a personal or corporate income tax.

[4] See Ark. Code Ann. § 26-51-409(b)(1).

[5] Code Miss. R. 35-III-8.03(102).

[6] See Miss. Dep’t of Revenue, Pass Through Entity Forms: Current.

[7] Pass-Through Entity Income and Franchise Tax Instructions (2016), at 4.

[8] Id.

[9] Ohio Rev. Code § 5733.09(B).

[10] See Ohio Dep’t of Taxation, Frequently Asked Questions, No. 126 (indicating that Form FT 1120S (Notice of S Corporation Status) is no longer required after tax year 2009).

[11] See N.J. Stat. Ann. § 54:10A-5.22(a).

[12] See N.J. Admin. Code § 18:7-20.1 (access available through LexisNexis®).

[13] See N.Y. Tax Law § 660(a).

[14] Ga. Code Ann. § 48-7-27(d)(2).

[15] Ga. Dep’t of Revenue, S-Corporations, FAQ.

[16] See Miss. Code Ann. § 27-8-19(3), (4).

[17] See 72 Pa. Stat. Ann. § 7307; Wis. Stat. Ann. § 71.365(4).

[18] See Utah S Corporation TC-20S Forms & Instructions, at 4.

[19] See Instructions for Form CT-6, at 1.