Q: Do we need to sign a special form from the state of Washington to change from a C-corp to an S-corp?
Thank you to a customer from Washington State for that great question! When electing S-corp tax status, you’ll need to submit form 2553 to the IRS. You won’t need to file any forms with the state of Washington. Many of our clients have questions about how to change their tax classification from C-Corp to S-corp, so we decided to address the topic in a blog post.
If you own a corporation, by default it will be taxed as a C-corporation (C-corp). However, if you meet certain criteria, you can file to be taxed as a Small Business Corporation (S-corp). We’ll explain how it works.
What is an S-corp in Washington State?
Contrary to popular understanding, an S-corp is not a type of business structure. It is simply a tax classification. You can learn about Washington business structures on the Washington Secretary of State website.
Both LLCs and corporations can elect S-corp tax status by filing with the IRS. In order to be eligible for S-corp status, your business must:
- Have only one class of stock
- Have only individuals as shareholders, not businesses (with a few exceptions)
- Have 100 or fewer shareholders, who must be US citizens/residents
What are the benefits of S-corp status?
Businesses taxed as S-corps are subject to pass-through taxation, which means that the business itself doesn’t pay taxes. Instead, the profits or losses pass through the business to its owners, who report them on their individual tax returns. Filing as an S-corp can save some businesses money on taxes, since they avoid “double taxation” (being taxed both as a business and as individual owners). However, to know for sure whether S-corp status will save your business money, it’s a good idea to consult a tax attorney or CPA.
Want to go deeper? Read Northwest’s guide on What is an S-corp?
How do I change from a C-corp to an S-corp?
To change from C-corp to S-corp status, you must file Form 2553 with the IRS. This form must be signed by all shareholders.
Learn more about Converting from a C-corp to an S-Corp.
What is the deadline to file for S-corp status?
If you want your S-corp status to go into effect this tax year, you must file no more than two months and fifteen days after the start of your fiscal year. For most businesses, the fiscal year starts on January 1st, meaning you’d need to file by March 15th. If you file any later in the year, your S-corp status will go into effect at the start of the next tax year.
How long will it take the IRS to process my S-corp application?
The IRS can take five months or longer to process S-corp applications. Once they’ve processed your application and approved it, they will mail you a letter of approval.
Do I need to file a form with the state of Washington when changing from a C-corp to an S-corp?
Nope! S-corp status is simply a tax election with the IRS, so you don’t need to file any documents with the state of Washington when you elect S-corp status.