Form 2553: How to elect an S corp tax status
Choosing a tax classification for your business is one of the first and most important steps in setting up. However, in some situations, businesses might have reasons to change their tax status when already operating.
The Internal Revenue Service (IRS) allows such changes through specific regulations. To elect an S corporation tax status classification for your business, you must file Form 2553, Election by a Small Business Corporation.
This guide explains everything you need to know about choosing S corporation tax classification. It will help you understand how to choose S corp tax classification. It also provides step-by-step instructions for completing Form 2553 and outlines the deadlines for electing S corp status and the requirements for making this election.
What is an S corporation?
An S corporation is essentially a tax status for your business: It defines how it is taxed, not how it is structured. A Limited Liability Company (LLC) or a corporation can elect this tax status if they meet the requirements defined by the tax code’s subchapter “S”.
The significant advantage of S corporations is their pass-through tax structure: They are not subject to corporate income tax. Instead, the company’s income, losses, credits, and deductions pass through to shareholders for federal tax purposes.
For example, an LLC might want to choose an S corporation tax status to reduce the owners’ self-employment taxes: In an S corp, the owners can be company employees, paying employment taxes on their salary but not on the business’s total profits.
Corporations might want to elect S corporation tax status to avoid double taxation of distributions. With an S corp, there is no tax at the corporate level, and the profits are only taxed once.
Form 2553 for electing S corporation status
You must complete Form 2553, Election by a Small Business Corporation, if your business entity is an LLC or a corporation and want to file taxes as an S corporation. You can find this Form on the IRS website in pdf.
Not every LLC or corporation can elect to be taxed as an S corporation. For instance, if your business has more than 100 shareholders or several classes of stock, you won’t be able to apply for this tax status. Also, generally, you can not have another LLC or corporation be a shareholder in an S corporation.
While most limitations deal with limits on shareholders, owners, and classes of stock, there are other conditions related to a type of entity, tax year, and other criteria.
If you are unsure if your entity meets the conditions for electing an S corp tax status, book a phone consultation with a TFX tax professional. An experienced tax expert will resolve your doubts and help you avoid costly tax mistakes when setting up or restructuring your business.
S corp election deadline
The general rule is that the election must be made within two months and 15 days of the beginning of the tax year for the S corp election to be effective that year.
The same rules apply for a shortened tax year. Say you started your business in the middle of the year and know you want to be taxed as an S corporation. Then, you have two months and 15 days from the date the company is formed for the election to be effective from that tax year.
If you miss this deadline, you can still file the election, but it will only be effective in the following tax year.
You also have the option to file a late election, but you should have reasonable grounds for doing so.
How to fill out Form 2553?
Part I
Provide basic information about the company, including its name, address, EIN, and date incorporated.
Pro tip. “Date incorporated” is the section business owners often make mistakes with. The date your entity was formed with the state is the one you must put here.
- Line D: Check the boxes if your entity changed its name or address after applying for the EIN.
- Line E: Put the date you want the S corporation tax status to be effective.
- Line F: Choose a selected tax year. In most cases, you’ll need to choose a “calendar year” in this section.
- Line J: Refer to page 2 of Form 2553 for further information on this line.
- Line H: Include the name and title of an officer or a legal representative, along with their phone number.
- Line I: This area is for a late S corp election. If you are applying for an S corporation election on time, you must leave it blank.
- Lines J, L, M, and N: Put the information about shareholders, including their names, addresses, stock owned or percentage of ownership, social security number or EIN, and the month the shareholder’s tax year ends.
- Line K: Each shareholder must sign the consent statement with a wet signature and put the date.
Your company might be formed in a community property state like California, Texas, or Washington. In that case, your spouse should also sign this form because they have a community interest in your S corporation. If this applies to you, put N/A or 0% in line L (stock owned or percentage of ownership).
Part II
Part II is only completed if you elected a non-calendar tax year in Part I (line F). If it’s your case, check out the IRS Form 2553 instructions on how to fill it in.
Part III
Part III of Form 2553 applies to qualified Subchapter S Trust. If applicable, we highly recommend getting guidance from a tax advisor before completing this part, as it might have many nuances depending on your current tax and legal situation.
Part IV
This part is reserved for making a late corporate election. Conditions under which the IRS may grant relief for late filings are the following:
- The entity is intended to be classified as an S corporation as of the election's effective date.
- The entity had reasonable cause for missing the deadline.
- The entity provides statements reflecting that every shareholder reported their income in a manner consistent with its intention to file as an S corp.
If you file Form 2553 promptly, you can skip this section.
How to submit Form 2553?
You can fax this form or send it by mail. Always check the delivery status to ensure the IRS receives it.
You may need to send this form to a different fax or address, depending on where your entity was formed. You can find this information on page 1 of Form 2553 or in the instructions.
S corporation tax status acceptance
An S corporation acceptance letter typically takes two to three months to process. If you do not receive it, check out the telephone assistance contacts for business customers and contact the IRS.
Once you elect an S corporation tax status, you do not have to make this election again for the following years. Remember that once you make it, it’s not easy to reverse.
Consult with a tax professional to ensure you make the right tax moves for your business.
FAQ
Form 2553 is the "Election by a Small Business Corporation" form used to elect S corporation tax status for eligible LLCs or corporations. It allows businesses to pass through income, losses, and deductions to shareholders for federal tax purposes.
Form 2553 should be mailed to the IRS Service Center designated for your state. The mailing address is provided on page 1 of the form or in the instructions.
You can file Form 2553 within two months and 15 days of the beginning of the tax year for it to be effective that year. If you miss this deadline, you can still file, but the election will be effective the following tax year. You also have an option for a late S corporation tax status election.
Each shareholder must sign form 2553 with a wet signature. Electronic signatures are not accepted.
No, you must submit Form 2553 by mail or fax to the designated IRS Service Center.
You'll receive an S corporation acceptance letter from the IRS within two to three months after submission. If not received, contact the IRS for assistance.
Once you elect S corporation tax status using Form 2553, you don't need to file it yearly. However, consult a tax professional for guidance to ensure compliance with ongoing S corporation requirements.
Disclaimer: This article is for informational purposes only and does not constitute legal or tax advice. Always consult with a tax professional regarding your specific case.