So, you have decided to be taxed as an S-Corp. How much do you know about the IRS Form 2553 Instructions?
Some companies can save on self-employment tax by electing to be taxed as S-corporations. S-corps are called “pass-through” entities. They don’t pay tax themselves as the income flows through to the owner’s individual tax returns.
To elect to be taxed as an S-corp, companies are required to submit Form 2553 to the IRS. In this guide, we will go step-by-step through the 2553 instructions. We will point out how to complete the form, consider the deadlines, and comment on some essential things to consider before filing.
Table of contents
- Overview of Business Taxation and S-Corporations
- Why Should You Consider Filing IRS Form 2553?
- Who Can File IRS Form 2553?
- Instructions to Form 2553
- What is the form 2553 deadline?
- Where to File Form 2553 With the IRS
- Final Thoughts
Overview of Business Taxation and S-Corporations
The IRS will tax you on the default tax classification when forming a new business entity.
For income tax purposes, s-Corps, sole proprietors, and partnerships are called “pass-through” entities. The business itself does not pay tax. Business owners will report their respective share of the business profit (or loss) on their individual tax returns. They must also pay tax based on their marginal tax rate.
When you set up a corporation, it starts by default as a C-corporation for income tax purposes. This means that the corporation will pay its own tax based on its business profit. It is a standalone taxable entity.
A C-corporation will pay a 21% income tax on the company’s taxable profit. It is also subject to state income tax. Shareholders will owe dividend tax on any dividends distributed from the company.
LLCs are taxed a little differently. They have a default classification but can also choose to be taxed as a pass-through entity or a C-corporation.
Why Should You Consider Filing IRS Form 2553?
When you file Form 2553, you are electing to have your LLC or C-corporation taxed as an S-corporation. This is only for federal tax purposes and does not change the company’s legal structure.
Because S-corporations are pass-through entities, they don’t pay a corporate-level tax. As such, they can bypass double taxation associated with C-corporations.
In addition, thanks to recent tax law changes, shareholders of S-corps, partnerships, and sole proprietors can deduct 20% of their business profit prior to the tax calculation. This is called the QBI deduction.
Many companies want to file Form 2553 and have their company taxed as an S-corporation to lower their employment taxes. While tax liabilities vary by the business entity, C-corporations tend to have the highest overall tax burden because of double taxation. That is, taxed first at the corporate level and then again at the individual level due to dividends.
Who Can File IRS Form 2553?
Only corporations and LLCs can file form 2553. If you own an LLC, filing this form won’t wholly change anything from a legal standpoint. Your business will still be an LLC. However, you’ll be taxed as an S-corp for federal tax purposes.
You’re able to submit Form 2553 if you meet all of the following conditions:
- The business is a domestic corporation.
- The entity has under 100 shareholders and only has one class of stock.
- All shareholders are individuals, estates, certain trusts, and exempt organizations.
- All shareholders must be U.S. citizens, resident aliens, or permanent residents.
- The company can’t be an insurance company, bank, or savings institution in most situations.
- The entity should have a calendar year ending December 31 or another eligible fiscal tax year.
- Each shareholder must consent to the S-corp election.
Your business can elect to be an S-corp by following the Form 2553 filing instructions if you qualify based on the above.
Instructions to Form 2553
Thankfully, Form 2553 is only a five-page form. It has information about the business as well as its shareholders. The data provided impacts whether the IRS will approve your form and what period it will start.
We will go through each of the four parts and include images and graphics for all parts. Here are step-by-step IRS Form 2553 instructions:
Part I: Election Information
Part I of Form 2553 covers basic information about the company and it’s shareholders. This section is pretty straightforward.
But it will help if you pull up your business on the state corporation commissions website. This is mostly needed for the incorporation date.
This includes the company’s name, address, and employer identification number (EIN). You also must provide the incorporation date and state of incorporation.
Take a look at the beginning top section A-C of the form below:
If you are an LLC, you are not technically a legal corporation. But most state corporation commissions will still list the date for you. So even though it may sound strange to you, go with the date listed on the state website.
The above section was simple. But gradually the questions will get more challenging. I will go though this next section of the form line by line. Here is the graphic:
On item E of Part I, enter the date you want your S-corp tax election to take effect and ensure you pay attention to the filing deadline. In most situations, you must file IRS Form 2553 no later than two months and 15 days after the effective date of the S-corp election.
Suppose you have a new business and elect S-corp tax status for your first tax year. It would help to put down the earliest of these dates in item E—the date the company first acquired assets, business transactions commenced, or the date shareholders were first received.
In Part I, you will note your calendar year or fiscal year. You will also write in the contact information for the company officer or CPA that the IRS would contact if they requested more information. Late filers should explain the delay in Part I.
The final Part 1 section has a table with rows to document each shareholder’s consent to the S-corp election. List each shareholder’s name, personal address, social security number, tax year, and the number of shares or ownership percentage.
There’s space for only seven shareholders, so attach an extra sheet with the same columns of information if you have more. A company officer, such as the president or financial officer, must sign at the end of Part I.
The last part of Part 1 is the shareholder consent statement. You can take a look at it below:
Part II: Selection of Fiscal Tax Year
Most businesses will have a fiscal year that is the same as a calendar year (January 1 to December 31). The fiscal year, or tax year, is the company’s annual period for tax and accounting purposes.
If your business fiscal year is not a calendar year, you must fill out Part II of IRS Form 2553. In Part II, you justify to the IRS why they would allow you to have a fiscal year different from a calendar year.
Here are a few situations when a non-calendar year tax period can make sense:
- Ownership tax year: Some companies have a fiscal year based on the desires of shareholders. This is called an ownership tax year.
- Natural business year: Some companies have seasonal businesses with specific busy periods followed by a slow season. For example, many retailers have a tax year ending at the end of January due to the busy holiday season.
- Business purpose year: There can be a variety of other business purposes that lead a company to select a non-calendar.
- Section 444 year: Section 444 of the tax code lets businesses choose a fiscal year ending on specific dates if the company makes periodic tax payments.
Use item P under Part II to declare the business year or ownership tax tests. Item Q is specifically for businesses with another business purpose. Companies using “business purpose” to justify their fiscal year will have to pay a $5,800 fee after filing IRS Form 2553. Use Item R to indicate a Section 444 fiscal year. The good news is that the IRS Form 2553 instructions have a few examples.
Part III: Qualified Subchapter S Trust Election
Part III will not apply to most small businesses. A Qualified Subchapter S Trust (also called a “QSST”) that would like to be a shareholder in an S-corp must complete Part III of the form. A QSST is a specific trust that has a single beneficiary. Any trust income is distributed annually (at the minimum).
Part IV: Late Corporate Classification Election Representations
You can skip Part IV unless your business files the form after the deadline. When this section is not applicable, all you need to do is sign the form.
If you are filing late, explain your reason for the late filing either on line I of Part I or attach a separate statement if necessary.
What is the form 2553 deadline?
The 2553 filing deadline is two months and 15 days after the beginning of the tax year in which you would like the election to take effect. If you are an established company, you can file any time during the prior year. This means the deadline is no later than March 15 for most companies, but it will differ for companies that follow a non-calendar tax year.
Here are some deadline examples:
- Established business: If your company has been around for a while, you have already filed taxes at least once. You want to change to S-Corp tax status starting January 1. The deadline is March 15 to file Form 2553. You may also the form anytime during the prior tax year.
- New business: You won’t have any prior tax filings if you have a new business. You have a new company whose tax year starts by default on January 1. Form 2553 is due by March 15, but you cannot file before January 1.
- Seasonal business: You could have a seasonal business with a tax year starting July 1. Your 2553 deadline would be September 15.
Whatever your specific deadline, filing Form 2553 on time is crucial if you want to elect S-corp treatment for a particular tax year. If you file late, you need to have reasonable cause or wait another year for the election to take effect.
Missed the Deadline? Late Filing Relief under Form 2553
If you miss the filing deadline, you have options. You can still receive S-corp status for the prior or current tax year if you demonstrate “reasonable cause.”
Your explanation for the wait can be provided on line I of IRS Form 2553 or included as an attachment. For a late election, shareholders must act like an S-corp as of the date the S-corp election was to take effect.
Note that the IRS mentions Form 8832 in the Form 2553 instructions. Form 8832 is designated explicitly for LLCs that are looking to be taxed as C-corps. Form 2553 is meant for C-corps and LLCs that want to elect S-corp tax status.
Where to File Form 2553 With the IRS
Currently, you are not able to file Form 2553 electronically. You must mail or fax the form. Using your business’s principal business location, use the addresses or fax numbers shown above to file.
Make sure to mail in the original form if you file by mail. If you choose to fax the form, ensure that you save the original copy of the form. The IRS Form 2553 instructions will address this issue.
After completing and filing Form 2553, you will often receive a response from the IRS within 60-90 days. The IRS letter will confirm if they’ve accepted or rejected your request.
When the election is made, it is in effect until your business entity dissolves or changes its tax status again. If you decide to terminate or revoke your S-corp status, you typically cannot re-apply for S-corp status for five years.
There’s no submission fee for Form 2553. The IRS can assess a fee in certain situations. For example, if you choose a non-calendar tax year based on a purpose described in Part III, item Q, the IRS will levy a fee of $5,800.
Do not mail any fee with Form 2553. The IRS will send a bill that will discuss payment terms. In some instances, an S-corp election filed after the deadline can also incur a late fee.
Remember, electing S-corp status is not a requirement. You can simply stay taxed as a C-corp or stick with LLCs’ IRS default tax classification.
But if you wish to file take advantage of S-corp tax status, you must file Form 2553 with the IRS.
Fortunately, this form should not be as intimidating as you thought. If you have questions or cannot complete the form yourself, we are here to help.