Filing Form 2553 to elect S-corporation status can provide significant tax advantages for your business. This blog breaks down the eligibility criteria for filing, step-by-step instructions, and deadlines to help you make the most of these benefits and ensure a smooth filing process.
Are you a small business owner looking to reduce your tax burden and gain limited liability protection? You’ll want to elect taxation as an S corp for that.
When you register your small business as a corporation with the Internal Revenue Service, it’s incorporated as a C corporation by default. However, eligible businesses can file IRS Form 2553 to elect S corporation status. This election comes with significant tax benefits and other advantages that can save your company money. Notably, S corporation status isn’t limited to corporations; limited liability companies (LLCs) can also elect to be S corps.
Did you know?
In 1997, S corporations became the most common type of entity filing a corporate return with the IRS.
Today there are around 7.4 million partnerships and S corps in the United States, making it the most popular corporate entity. Not only are these corporations surviving, but they are thriving and make up a majority of corporations today, effectively creating an environment where small businesses can thrive and compete.
Dealing with tax paperwork can be challenging for small business owners though, and even minor errors can lead to serious issues like back taxes, fines, or legal trouble. Therefore, ensuring all forms are completed correctly and filed on time is crucial.
In this guide, we provide all the necessary instructions for Form 2553, helping you make the most of the tax benefits of filing as an S corp.
Why file Form 2553?
The purpose of Form 2553 is to allow certain small businesses to choose to be taxed as an S corporation, a process often referred to as making an S-election.
The small businesses that can choose S corporation status include:
- Limited liability companies (LLCs)
- Partnerships
- Small domestic corporations
The main reason to make this election is to take advantage of the tax benefits that come with being an S-corp.
Unlike C-corporations, which face double taxation (paying corporate taxes on profits and shareholders paying personal income taxes on dividends), S-corps benefit from a pass-through tax structure. This means the corporation itself doesn’t pay income taxes; instead, the profits pass through to the owners or shareholders, who then report the earnings on their personal tax returns, paying tax at their individual rates.
For small business owners, especially those generating significant profits, this can result in considerable tax savings. By electing S-corp status, business owners can pay themselves a “reasonable salary” and take the remaining profits as distributions, which are not subject to self-employment taxes (Social Security and Medicare). This move can significantly reduce the overall tax burden, making more of the earnings available for personal use or reinvestment in the business.
It’s important to note that state-level taxation of S-corps can vary, so the benefits may differ depending on your location.
Eligibility criteria for filing Form 2553
To file Form 2553 and elect S-corporation status, your business must meet several specific eligibility requirements.
1. Domestic entity
Your business must be a domestic corporation or an eligible domestic entity, such as an LLC that can be treated as a corporation for tax purposes.
2. Allowable shareholders
Your shareholders must be individuals, estates, certain types of trusts, or exempt organizations under section 401(a) or 501(c). Partnerships, corporations, and non-U.S. residents cannot be shareholders.
3. Shareholder limit
Your business can have no more than 100 shareholders in total.
4. Stock class
Your business must have only one class of stock, meaning you cannot have both common and preferred stock.
5. Exclusions
Your business cannot be a bank, thrift institution, insurance company subject to tax under subchapter L of the Internal Revenue Code, or a domestic international sales corporation (DISCs).
6. Tax year requirement
Your business must adopt a tax year ending December 31, a natural business year, an ownership tax year, a tax year elected under section 444, a 52- to 53-week tax year ending with reference to one of these years, or another tax year for which a business purpose is established.
7. Shareholder consent
All shareholders must unanimously consent to the S-corporation election, and this consent must be documented and provided with the Form 2553 submission.
What information is required to complete Form 2553?
- Fax machine or digital scanner with fax capability: Form 2553 must be faxed to the appropriate IRS office, depending on the corporation’s home state.
- Corporation’s name and address: Ensure you have the legal name and registered address of the corporation.
- Employer identification number (EIN): The corporation’s EIN is necessary for identification purposes.
- Incorporation date and state: Provide the date of incorporation and the state where the corporation was incorporated.
- Desired effective date for S corporation status: Specify the date when you want the S corporation status to take effect.
- Contact information for an officer or legal representative: Include details of a designated contact person who will communicate with the IRS.
- Explanation for late filing (if applicable): If the form is filed late, provide a reason for the delay. Examples of acceptable justifications can be found in the official IRS instructions for Form 2553.
- Signatures from all shareholders: Ensure all shareholders sign the form, as their consent is required for the election.
Filling out Form 2553
Form 2553 is divided into four parts, each focusing on different information about your business.
Let’s break it down step by step.
Part I
In the first section, you’ll provide basic details about your company, such as its name, address, and Employer Identification Number (EIN). You’ll also need to include the Effective Date of Election, a list of all shareholders and the shares they own, and signatures from a corporate officer and all shareholders.
Remember, you must file the form within two months and 15 days after the start of your tax year. For businesses operating on a calendar year, this means filing by March 15. If you are making a late election, you can provide an explanation on page 1.
On page 2, you will need to provide information about your shareholders. For each shareholder, include their name, address, signature, number of shares (or percentage of ownership), and social security number.
Part II
This section is for businesses that have chosen a fiscal tax year or a 52- to 53-week tax year that doesn’t end in December, as indicated by checking box “2” or “4” in Part I, Item F. If this applies to you, it’s a good idea to consult a tax professional, as Part II can be complex.
Part III
Part III is relevant for qualified subchapter S trusts (QSST). If you need to complete this part, remember that you must also make the election in Part I. Part III cannot be submitted on its own.
Part IV
This section is for businesses submitting their application after the IRS deadline. To qualify for S corporation status in the same year you’re applying, you must file within two months and 15 days after the start of your tax year.
For instance, if you want 2024 to be your first year as an S corp and your tax year begins on January 1, you need to file Form 2553 by March 15, 2024.
Submitting Form 2553
You cannot submit Form 2553 online or electronically. You must send the original, completed Form 2553 (no photocopies) either by mail or fax to an IRS center.
There are two IRS center locations, and the correct one depends on your corporation’s main business, office, or agency location. You can find the relevant fax number and mailing address on page 3 of the Form 2553 instructions PDF.
We’ve listed them below for your convenience.
Mail it to the IRS at the Department of Treasury office in Kansas City, Missouri, if you’re filing in:
- Connecticut
- Delaware
- District of Columbia
- Georgia
- Illinois
- Indiana
- Kentucky
- Maine
- Maryland
- Massachusetts
- Michigan
- New Hampshire
- New Jersey
- New York
- North Carolina
- Ohio
- Pennsylvania
- Rhode Island
- South Carolina
- Tennessee
- Vermont
- Virginia
- West Virginia
- Wisconsin
Send it to the IRS at the Department of Treasury in Ogden, Utah, if you’re filing in:
- Alabama
- Alaska
- Arizona
- Arkansas
- California
- Colorado
- Florida
- Hawaii
- Idaho
- Iowa
- Kansas
- Louisiana
- Minnesota
- Mississippi
- Missouri
- Montana
- Nebraska
- Nevada
- New Mexico
- North Dakota
- Oklahoma
- Oregon
- South Dakota
- Texas
- Utah
- Washington
- Wyoming
Is there a deadline to submit Form 2553?
There is no specific deadline to submit Form 2553; it can be filed at any time of the year. However, the timing of your submission affects when the IRS will recognize your business as an S corporation.
To elect S corporation status for the current tax year, you must file Form 2553 within two months and 15 days after the beginning of the tax year.
For businesses using the calendar year as their tax year (closing books on December 31), the deadline to become an S corp for 2024 is March 15, 2024.
If you miss this deadline, you can still file Form 2553, but the S corp status will not take effect until the following tax year. For example, if you file on March 16, 2024, your S corp status will begin in 2025.
Relief for late filing of Form 2553
If you missed the deadline for filing Form 2553, relief is available, provided your corporation meets several conditions:
- Intention to elect S Corp status: The corporation must have intended to be classified as an S corporation from the desired effective date of the election.
- Reasonable cause: There must be a reasonable cause for missing the filing deadline. This involves explaining the circumstances that led to the delay and why it occurred.
- Consistent income reporting: Every shareholder must provide statements that reflect they have reported their income in a manner consistent with the corporation’s intention to file as an S corporation. This consistency is crucial for demonstrating the corporation’s intent and aligning shareholder reporting with S corporation tax treatment.
The bottom line
Form 2553 allows eligible businesses to elect S corporation status, offering significant tax benefits and advantages. However, the process can be complex and meticulous, requiring careful attention to detail to avoid errors that could lead to serious financial consequences.
Handling tax forms all by yourself can be overwhelming, especially with the plethora of duties that come with the job of being a small business owner. With CoCountant, you can ensure accurate and timely filing to help you maximize your tax savings and compliance.
Trust our tax advisory and filing services to handle your tax needs, so you can focus on growing your business, you can dedicate more time and energy to driving your business forward and exploring new opportunities.
FAQs
What is IRS Form 2553 used for?
IRS Form 2553 is used by businesses to elect S-corporation status. This election allows the business to pass corporate income, losses, deductions, and credits through to shareholders for federal tax purposes. By filing Form 2553, the business can avoid double taxation on corporate income and only the shareholders are taxed at their individual income tax rates.