Filing Form 2553: Essentials for Making an S Corp Election

Did you know you can change your business structure at any time? So, even if you are an established business, you may change your structure to suit your financial and tax goals. Your business classification can provide potential tax savings and reduce the taxes your business and you, the owner, pay.

One method some entrepreneurs use to secure tax savings is by electing S Corp status. Changing your company to an S corporation should be considered carefully. But if you decide to switch, you’ll file Form 2553 with the Internal Revenue Service (IRS).

A corporation or other entity eligible seeking to be treated as an S corporation will file Form 2553 to make an S Corporation election.

S Corp tax treatment means your business elects to pass income, deductions, losses, and credits to its shareholders for federal tax purposes. Then, S corporation shareholders report the income and losses on their personal tax return and are assessed tax on their personal income tax return.

Many small business owners choose this business entity because it prevents double taxation. That is, getting hit with taxes on income at the corporate and then again at the shareholder level. Below are the eligibility requirements to qualify for S Corporation status. Your company must:

• Be a domestic corporation
• Have only allowable shareholders (including individuals, estates, and certain trusts)
• Have less than 100 shareholders
• Have only one class of stock
• Not be an ineligible corporation

Who must file IRS Form 2553?

A corporation or eligible entity treated as a corporation files IRS Form 2553. By filing tax form 2553, a qualifying business can make the S Corporation election under section 1362(a).

What actions should you take before filing Form 2553?

Before you file tax form 2553, you should create your business’ by-laws, articles of incorporation, and other legal documents necessary to form and operate a business. Each form varies from state to state. Check your state’s Department of Revenue for more information.

You’ll want to ensure that your business’ bylaws or operating agreement includes language clarifying you wish to be taxed as an S corp. These foundational documents should also specify that any distributions made will be split solely based on ownership percentage. Already have these documents drafted? You must go back and amend them to include the above information. Even if you are currently a single-member LLC, if you decide to add a new owner in the future, you’ll be prepared.

What happens if you don’t fill out tax form 2553?

Here’s where the IRS will choose a default entity structure for you. If you don’t complete Form 2553, the IRS will categorize your business as a C corporation.

What’s included on the form?

Form 2553 has four parts. To get a feel for what the form asks for, we’ve created an outline of the basic Form 2553 instructions:

• The first section requires you to fill out general business information (like the formal name, FEIN, effective date of the S Corp election, shareholder information, and a form field for a signature.
• The second part has a form field to select the fiscal year you want to take the election.
• The third part has information about trusts and can be skipped if you’re not making an election for a qualified Subchapter S Trust.
• Part four only needs to be completed if you’re filing late.

Where should you send the form?

If you plan on DIY-ing your taxes, you can download, print, and send Form 2553 to the IRS yourself. Note that you cannot e-file this form. Of course, if you’re filing with Block Advisors, we’ll complete the form on your behalf with your input during your tax appointment—no need to stress over the IRS Form 2553 details.

When is the Form 2553 deadline?       

The form should be filed with the IRS before the 16th day of the third month of your business tax year. Or before the 15th day in the second month of your business tax year if the year is 2.5 months or less. You can file the form at any time in the previous tax year for the subsequent year you want the election to take effect.

If you don’t file Form 2553 on time, your business won’t receive S Corporation status until the following year unless you qualify for late S Corporation election relief.

Where to go for more small business tax help

Rely on our team of small business certified tax pros to get your taxes right and keep your business on track. Learn more at blockadvisors.com or make an appointment.

---

This article is for informational purposes only. The content may not constitute the most up-to-date information and should not be construed as legal advice.