What is IRS Form 2553?

IRS Form 2553 is utilised to elect S corporation status for qualified small businesses. By filing this form, companies can be taxed as S corps and enjoy the benefits of this tax status.

Why file form 2553 and become an S corp?

Here are the benefits of filing Form 2553:

  1. Limited Liability: Filing Form 2553 and becoming an S corp offers limited liability protection for personal assets.
  2. Tax Advantages: S corporations enjoy tax advantages through pass-through taxation.
  3. Credibility and Trust: It helps build credibility and trust with business partners.
  4. Financial Separation: It allows for a clear separation between personal and business finances.
  5. Attracting Investors: Attracts potential investors seeking S corporation status.

How are S corps and C corps taxed differently?

S corps and C corps are taxed differently based on ownership tax year. S corps enjoy benefits like limited liability and no double taxation, while C corps pay taxes on corporate income. On the other hand, S corporation owners pay taxes on their personal income tax return.

Eligibility requirements for filing form 2553

To file form 2553, business owners must meet the IRS eligibility criteria. One option is the qualified subchapter S trust election under section 1361(d)(2). Additionally, businesses need an employer identification number (EIN) to file form 2553. 

By satisfying these requirements and providing a unanimous consent statement from all shareholders, businesses can obtain S corp status, which offers tax benefits and limited liability protection for personal assets. The Internal Revenue Service provides guidelines and forms for companies seeking S-corporation elections.

Form 2553 instructions

  1. Part I of the form requires essential information about the entity filing the election for s corp status. 
  2. Part II, the business selects its fiscal tax year, which is crucial for tax planning. 
  3. Part III pertains to the qualified subchapter S trust election under section 1361(d)(2) of the tax code. 

Part I: Election Information

Part I of Form 2553 gathers essential details about the election being made. This section requires entity information, including the tax year, fiscal year, and effective date. Additionally, contact information is necessary for communication purposes. 

By providing this information accurately, businesses are taking the first step towards making their S corp election. 

Through Part I, the Internal Revenue Service (IRS) obtains the necessary information to process the election and ensure compliance with tax regulations. Filling out this section correctly is essential to ensure a smooth S corp status application process.

Part II: Selection of Fiscal Tax Year

Part II of Form 2553 allows businesses to select their fiscal tax year, also known as a natural business year. This choice determines the business's tax year's exact start and end dates. By selecting a fiscal tax year, companies can align their financial reporting and tax obligations with their specific operational cycle. 

Part III: Qualified Subchapter S Trust (QSST) Election Under Section 1361(d)(2)

Part III of Form 2553 focuses on the election of a qualified subchapter S trust (QSST) under section 1361(d)(2). This section applies explicitly to qualified subchapter S trusts. By electing QSST status, the trust can be treated as an eligible shareholder for S corporation tax purposes. 

Including this section in Form 2553 ensures that trusts meeting the requirements can benefit from the tax advantages and flexibility offered by the S corp election. 

It allows trusts to align their tax treatment with the entity's S corp status, providing potential tax benefits while maintaining its business purpose and objectives.

Part IV: Late Corporate Classification Election Representations

Part IV of Form 2553 pertains to late corporate classification election representations. This section is specifically designed for business owners filing the form after the deadline and seeking relief for their late filing. It allows them to provide the necessary information and documentation to explain the reasons behind their delayed submission. 


How to submit a completed form 2553

You have two options to submit a completed form 2553: filing with the IRS electronically or sending it by mail. Ensure that all sections of the form are correctly filled out according to the instructions provided on the IRS website. 

Remember, the S corp status only applies to federal tax purposes, so check the specific requirements and guidelines for your state for the current tax year.

What types of businesses don't need Form 2553?

Sole proprietorships, limited liability companies, & partnerships are not required to file Form 2553. These business entities have different tax classifications and do not need to elect S corporation status.

What's the deadline for filing Form 2553?

The deadline for filing Form 2553 is within 75 calendar days of the beginning of the tax year. If you submit the form late, include a reasonable cause statement and specify the effective date of election to avoid penalties and potential loss of tax savings.

If you're a newly formed business

To become an S corporation and enjoy its tax benefits, newly formed businesses must take a few crucial steps. First, they must determine the tax year for the effective date of the election. Then, they should complete and file Form 2553 with the Internal Revenue Service (IRS). 

This form requires basic information, contact information, and tax year information. It's important to note that businesses should obtain an employer identification number (EIN) before filing the form. 

If you're an existing business

When you're an existing business, a few essential factors must be considered before filing Form 2553. First, you must decide whether to elect a fiscal tax year or stick with the calendar tax year. It's crucial to file the form before the due date of your tax return. 

Review the ownership tax year requirements and understand the impact of a late election on your tax treatment. To ensure accurate filing, it's always a good idea to consult a tax advisor who can provide specific instructions tailored to your business.

What's the difference between Form 8832 and Form 2553?

Form 8832 and Form 2553 serve different purposes. While Form 8832 is used to change the tax status of an entity, Form 2553 is specifically for electing S corporation status. 

Also, Form 8832 applies to LLCs and other business entities, whereas Form 2553 applies to eligible corporations, including domestic and international sales corporations. Both forms require different information and documentation.

Tax Benefits of Filing Form 2553

Filing Form 2553 can offer potential tax benefits for C corporations and LLCs.

For C-Corporations

  • Avoid Double Taxation: C corporations can avoid double taxation of profits, which means they are taxed at the corporate level, and the shareholders are not subject to additional taxes on the dividends they receive.
  • Deduct Business Expenses: C corporations can deduct various business expenses, including salaries and operating costs, which can help reduce their taxable income.
  • Transfer Ownership without Tax Consequences: C corporations can transfer ownership without immediate tax consequences. This flexibility can be advantageous for estate planning and selling the business.
  • Limited Liability Protection: C corporations provide limited liability protection to their shareholders, which means shareholders' assets are generally shielded from the corporation's liabilities and debts.
  • Reduced Tax Burden on Corporate Income: C corps may have opportunities to manage their tax liabilities effectively, potentially reducing the overall tax burden on corporate income significantly when reinvesting profits into the business.

For LLCs

  • Pass-Through Taxation: LLCs can benefit from pass-through taxation, where the business's profits and losses are reported on the owners' tax returns, avoiding double taxation.
  • Flexible Ownership and Management Structure: LLCs offer a flexible ownership and management structure, allowing for varying levels of ownership and the ability to choose how the company is managed.
  • Limited Liability Protection: LLCs provide limited liability protection, which means the owners' assets are typically shielded from the company's liabilities and debts.
  • Potential Tax Savings: LLCs may achieve potential tax savings through various business deductions, which can reduce the business's taxable income.
  • Choice of Tax Treatment: LLC owners can choose tax treatment that suits their needs, including the option to avoid self-employment taxes, such as social security, under certain circumstances.


Closing Thoughts

In conclusion, understanding the purpose and benefits of IRS Form 2553 is crucial for businesses considering the S corp election. Becoming an S corp allows you to take advantage of tax benefits and avoid double taxation. 

However, meeting the eligibility requirements and following the instructions carefully when filing Form 2553 is essential. Remember to submit the completed form within the deadline, depending on whether you're a newly formed or existing business.

It's also worth noting that Form 2553 differs from Form 8832, used for entity classification elections. Consult with a tax professional to determine if filing Form 2553 is the right choice for your business and to maximise potential tax benefits.

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