CP261 Notice: The IRS Accepted Your S Corporation Election

What the CP261 notice says

The IRS page says it in one sentence: “We’ve accepted your S Corporation election per Form 2553, Election by a Small Business Corporation.” It calls the CP261 your “S corporation approval letter” and tells you to keep it in your permanent records.

The page then lists the company’s duties. File Form 1120-S, reporting the S corporation’s income or loss, with a Schedule K-1 for every shareholder. File all employment tax returns on time.

Check the effective date first

This is the line that matters most. The IRS page answers the common question of why the effective date differs from the date on the Form 2553: “You did not timely file Form 2553 for the effective date requested.”

IRC 1362(b) sets the timing. An election counts for a tax year if the corporation makes it during the year before, or during that year “on or before the 15th day of the 3d month of the taxable year.” For a company whose tax year starts January 1, that date is March 15. IRC 1362(b)(3) says an election made after that date counts for the following tax year instead. IRC 1362(b)(2) also moves an early-year election to the next year if, before the day the company made it, the company did not qualify for part of that year or a shareholder from that part of the year did not consent.

A later effective date means the company is not an S corporation for the months before it. Compare the date on your CP261 with the year you planned to file Form 1120-S.

If the date is not what you asked for

The IRS page says relief “may be available through Revenue Procedure 2013-30.” IRC 1362(b)(5) gives the IRS the power to treat a late election as on time when there was reasonable cause for the delay.

The IRS late election relief page sets the main tests. The company must have failed to qualify only because it filed the election late, it needs reasonable cause, and the company and every shareholder must have reported income as if the election were in effect. The relief covers only an election that would otherwise be valid; for example, every shareholder must still sign it.

The page adds a second limit. If the company had an invalid shareholder, or did not qualify during any part of the tax year, the election is not valid for that year. For some of those errors, the page points to a separate request to the IRS National Office under IRC 1362(f).

If the company does not qualify for that relief, the same IRS page says it may ask the IRS for a private letter ruling, which carries a fee.

Act on a wrong date soon. The relief page measures its window from the effective date the company wanted, so a request made too late can fall outside it. Read that page’s limits now.

What to do now

File Form 1120-S on time each year, with a Schedule K-1 for every shareholder, and file all employment tax returns on time. If the business address changes, the IRS page points to Form 8822-B. Our form finder links each of these forms to its current IRS.gov page.

If shareholders work in the business, the IRS page points to its guidance on S corporation compensation and medical insurance issues.

Lost the paper notice? The IRM lists the CP261 among the notices a business owner can view and print in the IRS Business Tax Account online. The same account shows the business’s balance and tax records, and it lets an eligible owner download a digital EIN confirmation.

How long the election lasts

One election covers the years ahead. IRC 1362(c) says the election stays in effect for the year it covers “and for all succeeding taxable years of the corporation,” until it ends under the rules for terminating an election. You do not file Form 2553 again each year. Keep the CP261 as proof of when the election began.

What people mistake the CP261 for

Some owners file it away without reading the date. That is the costly mistake, because a later effective date means the company is not an S corporation before that date.

Others treat the CP261 as the company’s EIN letter. It is not. The IRS confirms an employer identification number with a CP575 or a Letter 147C, as the IRM lists. Our CP575 page explains that notice.

Common Questions