What is IRS Form 2553 and Why it is Important?

Small businesses owners are required to register their business as a corporation with the Internal Revenue System, by default, it falls under C Corporation. However, when a business owner decides to file taxes as an S corporation, even if it’s a C Corporation, then it is required to file IRS Form 2553.

What is IRS Form 2553?

Election by a Small Business Corporation or IRS Form 2553 has to be filed with the IRS if a business owner wants to switch the status from C Corporation to S Corporation. The purpose of this switch is federal taxation.

Why is Form 2553 Important?

One of the most important benefits of Form 2553 is that it reduces tax liability. You are not required to pay a huge tax rate up to 35%. Instead, with the help of Form 2553 your corporation will get converted into a ‘pass-through entity’ for tax purposes. This implies that the income earned from your organization gets directly to you or any other shareholders. You are required to pay only the taxes on the income at your own tax rate.

When is Form 2553 Due?

Form 2553 must be filed on time if you want to avoid penalties. So, it must be filed:

It should be filed before two months and 15 days once the tax year begins and the S Corp election is to take effect
It should be filed any time during the tax year before the tax year the S Corp election is to take effect

Form 2553 Late Filing

You can get relief from late elections. However, there are certain criteria that need to be fulfilled:

The corporation that is entitled to be classified as an S corporation should be an eligible entity
It failed to qualify for an S corporation election because Form 2553 was not filed on time
There is reasonable cause for missing the deadline
The corporation and all shareholders reported their income in a consistent manner with the corporation’s intention to file as an S corporation.

What are the eligibility requirements to qualify for an S corporation?

There are some eligibility requirements that need to be met to qualify for an S corporation:

You have a domestic corporation
Your corporation should have no more than 100 qualifying shareholders
Your corporation should have only one class of stock
Your corporation should be an eligible entity

Where to get Form 2553?

Form 2553 is available on the IRS website. You need to complete the form online and then print it out.

What are the instructions for filing form 2553?

Form 2553 is divided into four parts. Let’s take a look at the instructions for filing Form 2553:

Part 1: Election information

Part 1 of the form requires you to fill in basic information such as the business’s name, address, and employer identification number. An Employer Identification Number or (EIN) acts as a Social Security Number and consists of a unique series of digits that is used to prove identity. It can also be used to identify an entity for tax purposes.

While filing Form 2553, you are also required to provide the names and addresses of all owners/shareholders. The form should also include Social Security Numbers for these individuals.

You also need to provide the number of shares of stock that each individual owns. You need to remember that there are some states that consider the stock as community property. That is why, a husband and wife are both considered individual shareholders, even if the stock is handled by only one spouse.

You also need to specify the tax year for which the filing would be considered.

Part 2: Selection of Fiscal Tax Year

You need to provide details about your fiscal tax year. The fiscal tax year refers to the 12-month period that can be used for financial reporting. The calendar year is mostly used as the fiscal year by most businesses.

In this section, you are supposed to answer some questions related to your tax year, whether you are changing or retaining your tax year. The chances of having a non-calendar tax year are high in case you are filing based on your natural business year, or you are making section 444 tax payments.

Part 3: Qualified Subchapter S Trust Election

This section is only for trusts applying for S corporation status. In case, you are a trust applying for S Corp status, then you will have to mention the beneficiary’s name, address, social security number, and the trust’s name, address, and employer identification number.

Part 4: Late Corporate Classification Election Representatives

If you file your application after the IRS deadline, then you have to fill this section. In order to qualify for S corporation status in the same year, then your deadline to file is two months and 15 days after starting of the tax year.

For example, if you want 2023 to be your first tax year as an S Corp then your tax year will start from January 1. You need to file Form 2553 by March 15, 2022.

How long does it take for Form 2553 to get approved?

Generally, your Form 2553 gets approved within 60 days of filing the form.

Are there any separate state rules for Form 2553?

Yes, the rules vary according to the state. There are some states that do not recognize Form 2553 for state income tax purposes. That is why you will have to file a separate form with your state tax authorities. You need to check with your state’s Department of Revenue or other relevant authorities. You can even consider seeking advice from your accountant regarding the same.

Key Takeaways

IRS Form 2553 has to be filed if you want your business to be recognized as an S Corporation for tax purposes
Filing Form 2553 helps in reducing tax liability
Form 2553 needs to be filed before two months and 15 days once the tax year starts and the S Corp election is to take effect
Form 2553 should be filed any time during the tax year before the tax year the S Corp election is to take effect
If your business meets certain conditions, then you can get relief from late elections
The corporation intended to be classified as an S corporation is an eligible entity; it fails to qualify for an S corporation election because Form 2553 is not filed on time; there is reasonable cause for missing the deadline, or the corporation and all shareholders reported their income in a consistent manner with the corporation’s intention to file as an S corporation.
To qualify for an S Corporation, you should have a domestic corporation, your corporation should have no more than 100 qualifying shareholders, your corporation should have only one class of stock and your corporation should be an eligible entity
Form 2553 is available on the IRS website. You need to complete the form online and then print it out
Form 2553 is divided into four parts; each part needs to be filled carefully
Part 1 of the form requires you to fill in basic information such as the business’s name, address, and employer identification number
Part 2 requires you to enter information related to fiscal tax year
Part 3 is only for trusts applying for S corporation status
If you file your application after the IRS deadline, then you have to fill Part 4 section
Generally, your Form 2553 gets approved within 60 days of filing the form
Yes, the rules filing Form 2553 rules vary according to the state