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What Is Form 2553?
Form 2553 is used to elect for taxation as an S corporation—corporations that pass tax liabilities directly to shareholders rather than the corporate entity. As a result, all deductions, income, and financial losses are reported by shareholders’ income tax statements. All S corporations are exempt from paying corporate taxes. Once you file as an S Corporation, your form 2553 becomes the effective date of your S Corporation election.
Why Is Form 2553 So Important?
Form 2553 allows business owners to elect to transform their corporation from a C corporation to an S corporation. Electing to pay tax as an S corporation may help to save on taxes. This is because shareholders can claim income and losses by their company on their personal income tax—and be taxed at personal tax rates.
What Is an S Corporation?
The name “S corporation” comes from Subchapter S of the Internal Revenue Code, which covers businesses that are exempt from federal corporate tax.
An S Corporation is a business structure that allows all taxable income, credits, deductions, and losses to pass directly to shareholders. There are some advantages to forming an S corporation, including avoiding “double taxation”—being taxed twice for corporate and income tax. S corporations are like a limited liability company (LLC), as both are considered “pass-through entities”, and both LLCs and S corporations provide limited liability protection for small businesses.
According to the IRS, to form an S corporation you must have fewer than 100 shareholders, and those shareholders should comprise “individuals, certain trusts, and estates.” All shareholders must be residents of the United States, and the corporation must be a domestic entity. In addition, the corporation must also have one class of stock.
The benefits of electing for taxation as an S corporation
One major benefit of registering your business as an S corporation is that it allows shareholders to be company employees and earn a salary. Shareholders can also receive dividends which can be earned tax free—if it does not exceed their stock basis.
During tax season, you can fill out Form 1120-S to record your S corporation’s income. To fill out Form 1120-S, you’ll need to make sure that all shareholders within the company are listed. Form 1120-S doesn’t need to be filed for any tax year before the S corporation election. Therefore, if you file for S corporation status in 2023, you won’t have to file an 1120-S form until the following year’s tax return.
What Is the Difference Between S Corporations and C Corporations?
By default, any business that forms a corporation can be considered a C corporation. Shareholders in C corporations are taxed separately from the corporation. They are subject to both individual taxes and corporate business taxes—also referred to as double taxation. Profits earned by a C Corporation are taxed, as are shareholder dividends.
Aside from the differences in taxation, S corporations and C corporations are both for-profit companies that follow the same corporate structures and laws. Both types of corporations will have similar internal systems—including having a board of directors and abiding by specific corporate bylaws.
What Information Do You Need to Fill Out Form 2553?
You’ll need some basic information about the business and its shareholders to fill out Form 2553.
- Your corporation’s address and name
- Your corporation’s employer identification number (EIN)
- The date of incorporation for your business
- The date that your business would like to elect for S corporation status—this may be a different date than the date you file the form.
- Information for the point of contact for the IRS—whether an appointed officer, the business owner, or a legal representative.
You may also need a fax machine or a digital scanner with the ability to fax documents.
When Should You File Form 2553?
To be considered for S corporation status, Form 2553 should be filed no later than March 15th, which is 2 months and 15 days after the start of the tax year. If you choose to elect for S corporation status partway through the year—after the eligibility period—you can fill out Form 2553 at any point throughout that year. At this stage, you may elect for S corporation status to come into effect at the start of the new tax year.
You may file a late election past the deadline, but you may need to provide a reasonable explanation for doing so. In addition, if all shareholders report their income with the desired intention to elect their corporation to receive S corporation status—and they have proof of documentation—they may file late.
Acceptance or Nonacceptance of Election
Within 60 days of Form 2553 having been filled out, you should receive a determination on your business’s election status. If you haven’t received information on the election, you can call the IRS at 1-800-829-4933. Once you’ve been accepted for election, it will stay in effect until it is terminated or revoked.
Form 2553 allows businesses to seek election as an S Corporation, and pass all taxable income, credits, deductions, and losses directly to its shareholders. Doing so allows shareholders to avoid paying corporate tax, and to have their income gains from the corporation taxed at personal income rate.
You may choose to elect for S corporation status to enjoy the benefits of limited liability under incorporation while avoiding double taxation.