Key Takeaways
- Form 2553 tells IRS a corporation elects S corp status.
- Only certain businesses can file it, mainly domestic corps meeting specific rules.
- Deadlines are strict—usually within 2 months and 15 days of the tax year start.
- Late filings are sometimes fixable but not always easy.
Introduction to Form 2553
What is this paper, Form 2553? It’s a form submitted to the Internal Revenue Service. Companies use it to make a particular choice about how they’ll be taxed. This is specificaly for corporations wanting to be treated as an S corporation rather than a standard C corporation for federal income tax purposes. The difference is significant how profits and losses flow thru to owners. You find details about this election process when exploring Form 2553 requirements. It isn’t a form every business needs, just ones opting for this tax status.
Who Needs to File This Election?
Not all businesses can or should file Form 2553. Primarily, a domestic corporation uses it. What kind of corporation? One meeting several specific criteria laid out by the IRS. These include limitations on the number of shareholders, the types of shareholders allowed (no partnerships, most trusts, or non-resident aliens), and having only one class of stock. Choosing the right business structure from the beginning is important, a subject discussed when considering which business entity to choose. If your business don’t fit the rules, this form is not for you.
Why Businesses Elect S Corp Status
Why bother with Form 2553 at all? The main reason is the tax treatment. S corps avoid the double taxation issue faced by C corps, where profits are taxed at the corporate level and again when distributed as dividends to shareholders. Instead, an S corp’s income, losses, deductions, and credits pass through to its shareholders’ personal income. Shareholder pay tax at their individual rates. This pass-through can be advantageous, especially for smaller businesses. It simplifies things sometimes, though it adds other rules you must follow.
When Form 2553 Must Be Filed
Timing is everything with Form 2553; deadlines are very strict. Generally, a corporation must file it either during the preceding tax year or by the 15th day of the third month of the tax year the election is to take effect. For example, a calendar-year corporation needing S corp status for the current year must file by March 15th. Filing even a day late can mean the election is ineffective for that year. There are some relief provisions for late filings, but relying on them is risky and not guaranteed. Is it possible to miss? Very possible.
Steps for Filing Form 2553
How does one file Form 2553? It involves completing the form accurately and submitting it to the correct IRS address. The form requires information about the corporation, its shareholders, and the chosen effective date of the S corp election. All shareholders must consent to the election by signing the form. This consent part is crucial and often overlooked. Make sure everyone agrees before sending it in. Sending it certified mail is often recommend for proof of mailing.
Common Pitfalls and Best Practices
Many stumble when filing Form 2553. The most common mistake is missing the deadline. Other errors include failing to obtain all necessary shareholder consents or incorrect eligibility (e.g., wrong type of shareholder). Best practices involve checking eligibility rules carefully before even starting. Double-check all information entered on the form. File well before the deadline, allowing time to correct any issues the IRS might find. Consider getting professional help to ensure it done right.
Late Election Relief & Consequences of Not Filing
What happens if you miss the deadline? The IRS offers some relief for late S corp elections under certain conditions, often requiring demonstrating ‘reasonable cause’ for the delay. This isn’t automatic; you typically must request it and explain why you were late. If you fail to file Form 2553 when required or your late election isn’t accepted, the corporation will remain taxed as a C corporation (or potentially another entity type), subject to those tax rules, including double taxation. This could mean paying more tax then expected. Penalties for filing other forms late, like those related to Form 1099-NEC, also exist but are separate issue.
FAQs About Form 2553
What is the primary purpose of IRS Form 2553?
It is used by eligible domestic corporations to elect to be taxed as an S corporation instead of a C corporation.
Who must sign Form 2553?
All shareholders of the corporation at the time the election is made must consent and sign the form.
Can a corporation file Form 2553 at any time?
No, there are specific deadlines. It’s usually within 2 months and 15 days of the start of the tax year for which the election is to be effective, or during the prior tax year.
What happens if Form 2553 is filed late?
A late election is generally not effective for that tax year unless the corporation qualifies for and receives late election relief from the IRS.
Can an LLC file Form 2553?
An LLC can file Form 2553 if it first elects to be taxed as a corporation by filing Form 8832, Entity Classification Election. Only entities taxed as corporations can then elect S corp status.