If you’re a corporation, you may be eligible for a special tax designation called “S corporation” that can help you save on taxes. To become an S corporation (or S corp), you’re going to need to know all about IRS Form 2553.
What is IRS Form 2553?
When you file to become incorporated with the IRS, your business entity will be a C corporation (or C corp) by default. If you want to elect to file as an S corporation (short for small business corporation or subchapter S corporation), you will file IRS form 2553.
Further reading: Business Entity Types: A Simple Guide
Why become an S corporation?
An S Corporation will file form 1120S come tax season, but will not be taxed on its profit (or loss). The biggest advantage to an S corporation election is avoiding double taxation.
Essentially, S corporations don’t pay income taxes, shareholders do on their income tax returns. C corporations pay a corporate tax with a tax rate of 21% in addition to what shareholders pay on their personal tax return.
S corporations are taxed differently at the state level meaning being an S corporation isn’t a surefire way to reduce your tax bill. Talk to a tax professional before making the switch to understand if the fit is right for you.
Further reading: The Complete Guide to S Corporation Taxes
S corporation vs limited liability company
S corporations and limited liability companies (LLCs) have a lot in common. Both have their net taxable income taxed to the company’s shareholders meaning the same tax benefits for your business. And both are separate legal entities, meaning the owners are not responsible for the business’s debts and liabilities.
The differences between S corps and LLCs include:
LLCs can have an unlimited number of members: an LLC can be a single-member LLC or a multi-member LLC with unlimited shareholders, but an S corp is capped at 100 shareholders.
LLCs can have non-resident alien shareholders: S corps are not permitted to have any non-US citizens as shareholders.
LLCs can be owned by corporations, partnerships, trusts, or other LLCs
If you’re considering incorporating, talk with a CPA or tax professional to find out if being an LLC is a better fit.
Further reading: What Is an LLC? and How Do You Start One?
Eligibility requirements of an S corporation
To be eligible to file form 2553 for an S corporation election, you must first be a C corporation. Your company must also satisfy the following requirements:
You must be a “domestic corporation” based and operating in the United States
You can only have “allowable” shareholders (no partnerships, other corporations, or non-U.S. citizens)
You cannot have more than 100 shareholders total
You can only have one class of stock meaning you can’t have a two-tiered common and preferred stock system
You can’t be an insurance company, bank, or a domestic international sales corporation.
All of your company’s shareholders must unanimously consent to S corporation status—proven with a provided consent statement
How to fill out form 2553
Start by downloading a copy of form 2553. There are four parts to form 2553 and here’s what to know about each one.
Part I: Election Information
This is where you will need to provide basic information about your company. Be prepared with the following:
The name, address, date of incorporation, state of incorporation and employer identification number for your business
The name and contact information for the corporate officer who the IRS can contact about your application
Information about the tax year for which your company intends to hold S corporation status
If you’re making a late election, you will also have an opportunity to provide an explanation as to why on page 1. Forms must be filed by 2 months and fifteen days after your tax year. For businesses whose tax year is the calendar year, this means you must file by March 15.
On page 2, you will have to provide information on your shareholders. For each shareholder, you must provide their name, address, signature, number of shares (or percentage of ownership) and social security number.
Part II: Selection of Fiscal Tax Year
You will be asked some simple questions about whether you are changing or retaining your tax year (fiscal year). You may have a non-calendar tax year if you’re filing based on your natural business year or if you’re making section 444 tax payments.
Part III: Qualified Subchapter S Trust (QSST) Election Under Section 1361(d)(2)
The name of this section can be daunting, but it’s only relevant for trusts applying for S corporation status. If you’re a trust applying for S corporation status, you must list the income beneficiary’s name, address, and social security number, the trust’s name and address, and its employer identification number.
Part IV: Late Corporate Classification Election Representations
This section will be for any businesses that will file their application past the IRS deadline. To qualify for S corporation status in the same year you’re applying for it, your deadline to file is 2 months and fifteen days after the beginning of the tax year.
For example, if your business wants 2021 to be your first tax year as an S corp and your tax year begins on January 1, you must file form 2553 by March 15, 2021.
When can you file form 2553?
The due date for filing form 2553 is no later than two months and fifteen days after the start of the tax year to be treated as an S corporation that year. But you don’t have to wait to file for an S corp election.
Form 2553 can be filed at any point after the deadline, however you won’t be granted S corp status until the following tax year. So if your deadline for S corp election in 2021 is March 15 and you’re filing form 2553 on March 16, 2021, you will not be granted S corp status until 2022.
Filing form 2553 late
Under certain conditions, the IRS may grant S corporation status for the tax year in the case of a late filing.
You will be eligible to file a late election if:
You planned to file as an S corporation by the intended effective date
You failed to file because form 2553 wasn’t filed on time
You have a reasonable explanation for missing the deadline
All shareholders have reported their income in compliance with S corporation standards—with the business’s income split between the members—based on the corporation’s intention to elect for S corporation status and the corporation has supporting documentation to prove it
How to get a copy of form 2553
When filling out form 2553, start by downloading a copy from the IRS website. Once approved, you will need to keep a copy of your completed form for your records—it will be required when filing your taxes.
If you need to replace a lost form 2553, you will have to contact the IRS to request a new copy to file taxes as an S corp. Call the IRS Business and Specialty Tax line at 1-800-829-4933. You will need to confirm your identity by providing your corporation’s name and address, your EIN, the business’s contact details, and your name and role within the company.
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