Form 2553, Selected by Small Business Corporations, is an IRS form that businesses can submit to elect to register as an S corporation instead of a C corporation. When a business is registered as a corporation with the IRS, it is incorporated by default as a C corporation. Many business owners choose to become an S Corp for various reasons, one of which is tax benefits. C corporations are often subject to double taxation, which can be a financial burden for small businesses. For an S Corp, income is taxed on shareholders, not the corporation. For the latest PDF version of Form 2553, follow this link to the IRS website.
Purpose of Form 2553
The primary purpose of IRS Form 2553 is to allow small businesses to register as an S corporation, rather than the default Corporation. Most business owners submit this form for tax purposes. S Corps save taxes because the corporation’s taxable income is taxed only once on the corporation’s shareholders. Owners of S Corp Late Election claim income and losses on their personal tax return and are taxed at their personal tax rate. A C corporation faces taxes at the corporate level and again at the shareholder level if it pays dividends.
Who needs to submit Form 2553?
In order for a small business to qualify for Form 2553 to register as a corporation, they must meet certain eligibility requirements. These requirements include:
- The business must be a domestic company or entity
- All shareholders of the company must be U.S. citizens or residents
- The number of shareholders shall not exceed 100
- Shareholders can only be individuals, estates, exempt organizations or certain trusts
- A business can only own one class of stock
The final requirement is that the business has or will take or transfer to one of the following tax years:
- Tax year ended December 31
- Natural business year
- Ownership tax year
- Tax year selected under section 444
- A 52-53 week tax year ending with reference to one of the other years listed previously
- Any other tax year (including 52-53 week tax years) for which the company (entity) establishes its business
Some companies are not eligible to file Form 2553. These companies include:
- Banks or savings institutions that use the reserve method to account for bad debts
- Choose a company that is considered a property company
- Insurance companies taxed under subchapter L of the Code
- Domestic and international sales companies
How many times do I need to submit a Form 2553?
Once a small business files a Form 2553 S Corp Election and is approved by the IRS to be considered an S Corp, the option remains open and the business owner does not have to file a Form 2553 each year. However, this form does have a deadline and must be filed on time to be effective for the current tax year you are filing. Businesses have two options for filing Form 2553:
- Option 1: Not later than two months and 15 days after the beginning of the tax year in which the S Corp election is effective.
- Option 2: The S Corp election is effective any time during the tax year proceeding the tax year.
If you filed Form 2553 late but still want to elect to become an S Corp for the current tax year, you do have some relief options. You may delay filing Form 2553 if you meet the following requirements.
The company plans to file an S Corp by the deadline
The company was not disqualified from being an S Corp for any other reason – it was just a delay in filing the company was disqualified. There is a reasonable reason to miss the application deadline. The company files a statement certifying that all shareholders report their income in a manner consistent with the company’s intent to file as an S Corp
Filing Fees for Form 2553
Filing Form 2553 with the IRS is free. However, certain special circumstances may incur charges. For example, if your company uses “business purpose” to justify its fiscal year, you will be required to pay a fee of $5,800 after filing Form 2553. This form cannot be submitted online and must be mailed to the IRS. Depending on the state in which you operate your business, state taxes may be payable and you may be required to file additional documents with state departments. If you’re not sure about state tax laws, you may want to contact a corporate attorney to help you complete the correct form.