Form 2553: Election by a Small Business Corporation

Form 2553: Election by a Small Business Corporation

Form 2553, Election by a Small Business Corporation, is an important document for small business owners who want their corporation to be treated as an S Corporation for federal tax purposes. This election allows small businesses to avoid double taxation on their income, which is a major benefit for many business owners. Instead of the corporation paying taxes on its profits, the income “flows through” to the owners’ personal tax returns.

In this guide, we will explain what Form 2553 is, how to file it, the benefits of electing S Corporation status, and key filing deadlines.

What is Form 2553?

Form 2553 is the official IRS form used by small business corporations to elect S Corporation status. A corporation that elects this status will be taxed as an S Corporation under Subchapter S of the Internal Revenue Code. This election allows the corporation to pass its income, deductions, and credits directly to its shareholders, avoiding the “double taxation” that typically applies to C Corporations.

By filing Form 2553, the corporation agrees to meet the requirements of an S Corporation, which include:

• Having no more than 100 shareholders.
• All shareholders must be U.S. citizens or residents.
• The corporation can only have one class of stock.
• The corporation must be a domestic entity.

The S Corporation election is typically beneficial for small businesses because it allows profits to be taxed at the individual shareholders’ rates, rather than at the corporate rate, which can be higher.

Who Needs to File Form 2553?

Form 2553 must be filed by any corporation that wishes to be taxed as an S Corporation. This includes:

1. Small Business Corporations
   Small businesses that are organized as C Corporations and wish to avoid double taxation should consider filing Form 2553 to elect S Corporation status. The S Corporation election allows these businesses to have income “flow through” to shareholders and avoid corporate-level taxation.

2. New Corporations
   Newly formed corporations that want to elect S Corporation status should file Form 2553 within the required time frame after incorporating.

3. Existing Corporations
   If an existing C Corporation wants to change its tax treatment to S Corporation status, it must file Form 2553. However, the corporation must meet the requirements for S Corporation status to make the election valid.

Requirements for S Corporation Status

To qualify for S Corporation status and file Form 2553, a corporation must meet the following requirements:

1. Be a Domestic Corporation
   The corporation must be organized and operate within the United States.

2. No More Than 100 Shareholders
   An S Corporation can have no more than 100 shareholders. The shareholders must be individuals, certain trusts, or estates—partnerships, corporations, and non-resident aliens cannot be shareholders in an S Corporation.

3. Single Class of Stock
   The corporation must have only one class of stock. This means that all shares must carry equal rights to distribution and liquidation proceeds.

4. Eligible Shareholders
   All shareholders must be U.S. citizens or resident aliens. Non-resident aliens or corporations are not permitted to be shareholders of an S Corporation.

How to File Form 2553

Filing Form 2553 is essential to officially elect S Corporation status. Here’s a step-by-step guide on how to complete and file the form:

1. Gather Required Information
   You will need basic information about your business, including:

   • Corporation name, address, and employer identification number (EIN).
   • Date of incorporation and the tax year for the S Corporation election.
   • Shareholder information, including names, addresses, and taxpayer identification numbers (TINs).

2. Complete Part I of the Form
   The first section of Form 2553 asks for general information about your corporation. This includes:

   • Name of the corporation.
   • Employer Identification Number (EIN).
   • The date of incorporation or formation.
   • The tax year you wish to use for your S Corporation election.
   • A statement of consent from all shareholders.

3. Complete Part II (Election Information)
   Part II is where you provide details about the S Corporation election. You will need to specify the date when the election should take effect and whether the corporation will have a fiscal year or a calendar year. You must also include the signatures of all shareholders, consenting to the election.

4. Submit Form 2553 to the IRS
   After completing the form, submit it to the IRS by the due date. The form can be filed electronically, through the IRS e-file system, or by mailing the completed form to the appropriate IRS office.

5. Wait for IRS Confirmation
   After filing, you should receive confirmation from the IRS that your election has been accepted. If there are issues with your application, the IRS may contact you for clarification.

Deadlines for Filing Form 2553

Timely filing is essential to ensure that your election is accepted by the IRS. Below are key deadlines to keep in mind:

1. New Corporations
   A new corporation must file Form 2553 no later than 2 months and 15 days after the beginning of the first tax year it wishes to be treated as an S Corporation. For example, if your corporation was formed on January 1, 2025, you must file Form 2553 by March 15, 2025.

2. Existing Corporations
   An existing corporation wishing to change its tax status to an S Corporation must file Form 2553 by the 15th day of the 3rd month of the tax year in which the election is to take effect. If you miss this deadline, your election will apply to the next tax year.

3. Late Elections
   If you miss the deadline for filing Form 2553, you may still qualify for retroactive S Corporation treatment if you can show that the failure to file was due to reasonable cause and not willful neglect. In this case, the IRS may accept your late election.

Benefits of Electing S Corporation Status

There are several tax advantages to electing S Corporation status for your business:

1. Avoid Double Taxation
   One of the biggest benefits of S Corporation status is that it avoids double taxation. In a C Corporation, the business is taxed on its profits, and then shareholders are taxed on the dividends they receive. With an S Corporation, income passes through to shareholders and is only taxed on their individual tax returns.

2. Self-Employment Tax Savings
   S Corporation shareholders who work for the company are considered employees and receive wages. This allows the business to avoid paying self-employment taxes on the full amount of income. However, shareholders must pay themselves a reasonable salary, which is subject to payroll taxes.

3. Simplified Ownership Structure
   With an S Corporation, the ownership structure is simpler than in a C Corporation. S Corporations can have only one class of stock, which means that all shareholders have equal rights to profits and voting.