When you consider changing the status of your corporation into an S corporation, you would need to familiarize yourself with IRS Form 2553. Becoming an S corporation allows you to enjoy tax benefits and returns and shareholder dividends.
Use this guide to learn more about IRS form 2553 filing instructions on how and when to submit it.
What is Form 2553?
IRS Form 2553, also known as "Election by a Small Business Corporation," is a tax form that the Internal Revenue Service requires small businesses to file to switch from a C Corporation to an S Corporation. The 5-page document contains four parts, which you need to fill out completely and correctly. The form helps companies receive better tax benefits and returns and avoid hefty taxes, which corporations encounter.
Federal form 2553 establishes a sole proprietorship or partnership as an S Corporation and alters how you would file your taxes. It requires businesses to provide their organization, shareholders, and fiscal year. Although, you may need to file additional pages if you have several shareholders.
The IRS provides form 2553 filing instructions to help you complete and file the document. Once you finish the form and other additional documents to create a corporation, the IRS would approve whether your business could pass and operate as an S Corporation. If your organization does not qualify, you might want to apply as another operating entity or recheck all documents.
However, there are several things you need to consider when filing form 2553 S Corporation. Form 2553 is not a default tax classification, so you would still need to request to file your taxes this way. It sets up your business for federal taxation purposes, but it does not mean that you are exempt from paying FICA and FUTA taxes on your earnings.
Difference Between C and S Corporation
Our detailed comparison guide describes all pros and cons of S Corp and C Corp. The main difference between a C Corporation and Form 2553 S Corporation lies in how the two entities pay their taxes. Under IRS rules, C Corporation is the default or standard, while the S Corporation has a special tax status with the IRS, which gives it some tax advantages.
C and S Corporation both get their names from the IRS code under which they are categorized. C Corporations are taxed under Subchapter C while S Corporations are taxed under Subchapter S. When electing and forming an S Corporation, federal form 2553 should be filed with the IRS, ensuring that all guidelines and requirements are met.
If you have a C corporation, you pay tax based on income and additional tax on any income you receive as an employee or owner. Meanwhile, if you are an S corporation or become an S corporation after filing IRS form 2553, you do not pay taxes. Instead, you and other shareholders or owners count the company's revenue as personal income.
C Corporations do not have any limitations when it comes to ownership, which means anyone could be an owner. There could also be as many owners as you want. Meanwhile, S Corporations are restricted to at most 100 shareholders that are supposed to be U.S. citizens.
Classifying your business as an S Corporation would give you benefits, such as eliminating double taxation. Paying tax twice occurs when a small business owner pays taxes on both their personal income (derived from the business' profits) and the business' profits.
Form 2553 Filing Instructions
Small business owners could download the IRS form 2553, which you could print out and complete by hand or fax to the IRS. Filing a federal Form 2553 is free. However, there could be situations when the IRS charges a fee, in which case the agency sends the business owner a bill.
The IRS provides Form 2553 filing instructions on its website. Some parts of the form are self-explanatory and easy to follow. However, if you are confused, you could follow this quick guide to breeze through each page.
- Title Page (Page 1): Mailing Address
The first part of form 2553 provides details of the address where you would need to send your application. Enter which state your business operates and use the address provided to file the form. The agency receives a ton of mail, which is why it has its own zip code and does not have a street address for either its Kansas City, Missouri or its Ogden, Utah locations.
- Part 1 (Page 2 and 3): Election Information
The first part of the federal form 2553 has two pages that require you to enter election information. Part 1 requires you to fill out boxes to identify and give information about your organization.
- Item A (Employer Identification Number (EIN) – Enter your corporation's EIN, and if it does not have one, you must apply for it.
- Item E (Effective Date of Election) – Determine the date when your company made the election to change into an S Corporation.
- Item F – Select the box that matches with the S corporation's chosen tax year. If you check box (2) or (4), provide additional information about the tax year and complete Part 2 of the form.
- Signature – All shareholders must sign and date IRS Form 2553.
- Column J – Name and address of every shareholder needed to consent to the election.
- Column K (Shareholder's Consent Statement) – Every shareholder needs to consent by signing and dating either in column K of the form or on a separate consent statement. Refer to the IRS's guidelines to know the specific rules that determine who must sign the form.
- Column L - Enter the number of shares of stock each shareholder owns on the date the corporation filed the election and the date(s) each shareholder acquired their stock.
- Column M - Input the social security number (SSN) of each shareholder listed in column J. Enter the EIN of each estate, qualified trust, or exempt organization.
- Column N - Provide the month as well as the day that each shareholder's tax year ends.
- Tax Year
Many corporations follow the January 1 – December 31 calendar year as their tax year. However, some companies use fiscal years that correspond better with their operations. For example, if an organization has major business during the summer, the company could decide to end its fiscal year during the fall.
Part 1 of IRS Form 2553 also requires you to indicate if you have more than 100 shareholders, as this could limit your eligibility and if you elected to file late. You must file federal Form 2553 within two and a half months of your corporation's tax year.
You have until March 15 to accomplish the form if the corporation's tax year begins on January 1. Meanwhile, you could also complete the form in advance for the succeeding tax year if you missed the deadline to file form 2553.
If you still want to file for form 2553 S Corporation beyond the approved deadline, you would need to provide a written explanation as to why and the measures you would take to correct your actions. Form 2553 late filing could cause the IRS to deny your application, which you would need to reapply the following year.
- Third Page
The third page of form 2553 includes shareholder consent to change into an S corporation. It also covers the number of stock shares each shareholder acquired, their individual Social Security number (EIN), and their corresponding tax year.
Determining and deciding who owns your company's shares is critical when filing to become an S corporation. This would define how the corporation pays dividends each year.
Page 3 currently has seven spaces for shareholders. However, if you decide to have more, you need to use additional pages and add each individual to ensure that your whole business is adequately represented.
- Part 2 (Page 3): Selection of Fiscal Tax Year
Page 3 contains Part 2 of IRS form 2553 with the title "Selection of Fiscal Year." You could complete Part 2 if you checked box (2) or (4) of Part 1 Item F (Selected Tax Year). The third page of Form 2553 reviews the fiscal tax year of your organization.
Item O probes if your corporation would adopt the same fiscal tax year specified in Item F from page 2 or if you want to change it. If the tax year needs to change, form 2553 will ensure all shareholders agree to the measure and that their tax year corresponds with the corporation's tax year.
This section also asks about contingency plans in case the IRS denies your tax year. The agency sets a standard tax year of January to December. Although, there are certain exceptions for various departments.
Part 2 of federal form 2553 is straightforward if you already operate on a tax year ending on December 31. The form may seem complicated, but it would not be a problem if you elect to have a standard tax year. Additionally, if you want to avoid penalties for missing different filing dates and create confusion, you would need to report to the IRS if your tax year differs from this one.
- Part 3 (Page 4): Qualified Subchapter S Trust (QSST) Election
The fifth page (final page) of form 2553 includes two aspects: trust and late classification. Part 3, titled Qualified Subchapter S Trust (QSST), allows an income beneficiary, such as a child or partner or legal representative, to receive assets in the event you pass away.
Enter the beneficiary's name, address, and Social Security number, as well as the trust's name and EIN.
- Part 4: Late Corporate Classification Election Representations
The final part, Part 4 (also on the last page), only comes in when you seek a late corporation classification election presentation. You would need to complete additional forms to qualify for such special exceptions.
When is the Deadline to File Form 2553?
According to the IRS's Form 2553 filing instructions, if your organization decides to change to an S Corporation status for tax purposes, you would need to file the form:
- No Prior Tax Year. No more than two months and 15 days after the beginning of the tax year the election is to take effect; or
- Prior Tax Year. At any time during the tax year preceding the tax year it is to take effect.
- Tax Year Less than 2 ½ Months. Within two and a half months from the beginning of the first tax year the corporation was established.
If you miss the deadline to file form 2553, you could still submit Form 2553 to the IRS. However, the IRS would tax you with a default tax classification. This means that you would not enjoy the benefits of an S Corporation until the following year.
The IRS would notify you if your corporation qualified for a form 2553 S corporation within 60 days of filing. If the IRS approves your form 2553 S corporation application, it will send you a letter confirming your status. This is also true if your application has been denied. Record and store this copy for your reference.
Where to File Form 2553?
To become an S corporation, business owners can file form 2553 by printing the form and mailing it or fax it to the IRS. The government agency has two different locations where it receives S corporation applications. Page 1 of IRS form 2553 lists the state (Missouri or Utah) you need to send your completed document. The location depends on where your business entity, office, or agency is located.
You could check the IRS' list of locations to identify which state to send your form to. Remember not to mail Form 2553 to your closest location, as the IRS' sites are not based geographically. This means that even though you live closer to Missouri, it does not mean that your form goes to the Kansas location.
Sending your form, either deliberately or by accident, to the wrong address would substantially cause delays in approval. It could even cause the IRS to ignore your application entirely.
As a small business owner, getting to know which ways to benefit your company is a must. Filling out IRS Form 2553 requires attention to properly and accurately complete. Take your time to follow form 2553 filing instructions. Make sure each item on the five-page form is correct to avoid delays on your S corporation approval or refiling with corrections.
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