July 1, 2025
For many small businesses in the United States, electing to be treated as an S corporation for federal tax purposes is a foundational strategic decision. Governed by Subchapter S of the Internal Revenue Code, this election allows a corporation to avoid the "double taxation" that typically applies to C corporations, where income is taxed first at the corporate level and again at the shareholder level upon distribution. By filing Form 2553, "Election by a Small Business Corporation," with the Internal Revenue Service (IRS), an eligible domestic corporation can pass its income, losses, deductions, and credits directly through to its shareholders to be reported on their personal tax returns. This pass-through mechanism is a cornerstone of tax planning for entrepreneurs, offering significant potential savings and simplifying the federal tax structure.
However, a critical and often overlooked complexity arises at the state and local levels. The federal S corporation election is not a universal passkey that guarantees identical tax treatment across all fifty states and their municipalities. A complex and varied patchwork of state-specific rules governs the recognition and taxation of S corporations, creating a compliance labyrinth for businesses operating beyond a single state's borders. This lack of uniformity presents a significant challenge, as an entity enjoying federal pass-through benefits may find itself treated as a standard C corporation, subject to entity-level taxes and burdensome filing requirements in another jurisdiction. This report provides an exhaustive analysis of the states and localities that deviate from automatic federal conformity, detailing which jurisdictions require a separate, affirmative election and which do not recognize the S corporation status at all.
Disclaimer: The content of the infographics is provided for general informational purposes only and is not intended to constitute legal, tax, accounting or other professional advice. You should not act or rely on any information herein without seeking the guidance of a qualified professional who is fully aware of your individual circumstances. Neither the author nor the publisher assumes any responsibility for errors or omissions or for outcomes related to the use of this information.