Form 2553: A Simple Guide to S Corporation Election
Form 2553, officially called the “Election by a Small Business Corporation”, is an important IRS tax form used by businesses to elect S corporation status. Electing S corporation taxation allows a business to be taxed similarly to a partnership while also providing liability protection like a corporation.
What is an S Corporation?
An S corporation is a federal tax status created by the IRS to give small business corporations and LLCs a tax advantage. Instead of paying taxes on corporate profits, S corps pass income and losses onto the personal tax returns of shareholders. This avoids double taxation of dividends.
Some key facts about S corporations:
- Income/losses are passed through to shareholders’ tax returns
- Avoidance of double taxation on corporate income
- Limited to 100 shareholders
- Only one class of stock permitted
- Requires filing Form 1120S for corporation tax return
Why Choose S Corp Status with Form 2553?
The top reasons to become an S corp include:
- Avoidance of double taxation of profits
- Pass-through taxation usually means lower taxes
- Reduced IRS audit risk compared to C corps
- Operational flexibility of a corporation
- Liability protection for shareholders
Who Can File Form 2553?
To be eligible to file Form 2553, the business must meet requirements including:
- Be a domestic corporation or LLC
- Have 100 or fewer shareholders
- Have only one class of stock
- Have shareholders who are U.S. citizens or residents
- Not be an ineligible entity like certain financial institutions
When Should Form 2553 Be Filed?
To elect S corporation status beginning on January 1 of the following year, Form 2553 must generally be filed by March 15. However, you can file Form 2553 at any time during the tax year.
Late elections are also allowed within certain timeframes by requesting relief.
How Should Form 2553 Be Completed?
Follow these steps to complete Form 2553:
- Fill in entity information and shareholder names/addresses
- Provide shareholder consent signatures
- Select an accounting method (cash or accrual)
- Indicate if electing S corp status as of an early effective date
- Sign and date Form 2553
- Mail to the appropriate IRS address listed on the form
Complete all sections accurately and ensure shareholder consents are original. Consider working with a tax professional or attorney given the importance of properly electing S corporation status.
What if Form 2553 Is Filed Late?
The IRS may grant relief for a late S corp election if filed within 3 years and 75 days of the original deadline and reasonable cause is shown. File Form 2553 with a written statement explaining the reason it is late.
Certain automatic late election relief procedures may also allow a late-filed Form 2553. Consult a tax advisor for the best approach if you miss the filing deadline.
When Does S Corporation Status Become Effective?
If Form 2553 is filed any time before the tax year begins, S corp status will take effect on January 1 of the desired effective year. If filed during the tax year, it becomes effective on the date Form 2553 is received and date stamped by the IRS.
Does My State Require a Separate S Election?
While Form 2553 is filed with the IRS, most states require individuals to also file a state-specific S corporation election form. Check with your Secretary of State to determine requirements.
What Happens After Filing Form 2553?
If accepted, the IRS will send an acceptance letter officially recognizing your S corporation status. Be sure to keep a copy of your completed Form 2553 as documentation of your active S election. Going forward, file Form 1120S for your annual S corp tax return.
Can an S Election Be Revoked or Terminated?
Yes, an S corporation can voluntarily revoke its election by filing Form 2553 again and selecting that the corporation is revoking its election. Involuntary termination may occur if the business fails to meet eligibility rules.
This comprehensive guide covers the key aspects of Form 2553 and electing S corporation status. Please let me know if you have any other questions!
