To receive the tax advantages and operational flexibility that come with S Corporation status, business owners must file IRS Form 2553. But how exactly should you file this form to make an S Corp election?
This guide will give you an overview of S corp status and break down Form 2553 to help you get started.
Key Takeaways
S corp status offers several business tax advantages, which can result in significant tax savings.
It’s essential to check if your business is eligible for S Corp election before filing Form 2553.
You must file IRS Form 2553 no later than two months and 15 days after the beginning of the tax year you want the election to take effect or any time during the preceding fiscal tax year.
What Is Form 2553?
Form 2553, Election by a Small Business Corporation, is the IRS application for S Corp status. If your business is eligible, you can submit this application to the IRS to be taxed as an S Corporation.[1]
Why would you want to complete an S corp election, though? For starters, S Corp status offers several tax benefits. For example, all profits and losses pass directly to shareholders, who report them on their personal income tax returns. This is especially advantageous for C corporations as shareholders avoid double taxation by not paying federal taxes at the corporate level.
There are many other advantages and disadvantages of S corp status for corporations and other eligible entity types. Let's dive into a few.
Pros and Cons of S Corp Status
S Corp Pros:
Avoid double taxation to potentially receive significant federal tax savings
Benefit from limited liability for directors and shareholders
Boost your credibility and become more attractive to investors
Receive lower self-employment taxes for LLCs through flexible compensation
Transfer ownership with no tax consequences
S Corp Cons:
Must fit strict requirements
Can have no more than 100 shareholders and only one class of stock, which might limit expansion plans
Can be harder to raise equity financing compared to corporations
Will receive closer IRS scrutiny, especially on shareholder dividends or salary distributions
How to File Form 2553 for S Corp Status
1. Determine Your Eligibility
Before you apply for S Corp benefits, you need to check that your small business meets the following criteria:
Be a domestic corporation or LLC (bank or thrift institutions, insurance companies, or domestic international sales corporations (DISC) are not eligible)
Have no more than 100 shareholders
Have only individuals, certain trusts, or estates as shareholders
Have no nonresident alien shareholders
Have only one class of stock[2]
An eligible S corp must also have or will adopt to one of the following tax years:
Tax year ending December 31
Natural business year
Ownership tax year
Tax year elected under section 444
52-53-week tax year ending with reference to one of the years listed above
Any other tax year that the entity can establish a business purpose for[2]
If you tick all these boxes, you’re eligible to make an S Corp election.
2. Review Election Due Dates
You must file IRS Form 2553 no later than two months and 15 days after the beginning of the tax year you want your election to take effect. Let’s say you want your S Corp status to begin January 1 and have a tax year end of December 31. In that case, you would file by March 15.
You can also file any time during the fiscal tax year preceding the tax year your S corp election will take effect.[3]
If you missed the window for any reason, there's still a grace period for late filings. However, you must meet certain requirements and file paperwork explaining a reasonable cause for missing the deadline.
3. File IRS Form 2553
The most critical step is to file Form 2553 with the IRS. The form itself is divided into three parts, each asking for details about your election:
Part I: identification information, including company name, address, EIN, shareholder social security numbers, and date of incorporation
Part II: consent statement of all shareholders with signatures
Part III: tax year election information[4]
Once you've completed the form, double-check every section for accuracy.
There are no fees for this document. However, if you request a fiscal tax year in part III of the form (box Q1), you will be charged a $6,200 user fee.
You will mail or fax this form to the IRS; however, the address depends on your principal business location.
If you’re in:
Connecticut
Delaware
District of Columbia
Georgia
Illinois
Indiana
Kentucky
Maine
Maryland
Massachusetts
Michigan
New Hampshire
New Jersey
New York
North Carolina
Ohio
Pennsylvania
Rhode Island
South Carolina
Tennessee
Vermont
Virginia
West Virginia
Wisconsin
File the form to:
Department of the Treasury
Internal Revenue
Service Center
Kansas City, MO 64999
Fax: 855-887-7734
Otherwise, you should file it to:
Department of the Treasury
Internal Revenue
Service Center
Ogden, UT 84201
Fax: 855-214-7520
Processing times can also vary, so plan accordingly and consider the timing of your submission with your effective date for S Corp status.
FAQs
What is Form 2553 used for?
IRS Form 2553 is the application a corporation or other eligible entity type can submit to elect S corp status.
Why would an LLC file Form 2553?
LLCs can file Form 2553 to be taxed as an S corporation. While an LLC already benefits from the pass-through taxation offered by S corps, S corp status can help LLC owners reduce their self-employment tax liability, among other benefits.
How much does it cost to file Form 2553?
There are no fees to file Form 2553. However, if you request a fiscal tax year in part III of the form (box Q1), you will be charged a $6,200 user fee.
How long does it take the IRS to approve Form 2553?
You will generally receive a determination for your S corp election within 60 days.
Who needs to file Form 2553?
Any eligible domestic corporation or LLC interested in S Corp status must file Form 2553 to make the election.
Should I switch from a C Corp to an S Corp?
You might be interested in switching from a C corp to an S corp for the tax benefits, including avoiding double taxation. However, keep in mind that shareholder restrictions might limit future expansion plans.
What are the eligibility requirements for filing IRS Form 2553?
An entity must be a domestic corporation or LLC, have only allowable shareholders (individuals, certain trusts, and estates), feature only one class of stock, and have no more than 100 shareholders.
Can I file Form 2553 online?
The IRS will only accept Form 2553 submissions via mail or fax.
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Bibliography
Internal Revenue Service. "Instructions for Form 2553 (12/2020)." Accessed March 7, 2024.
Internal Revenue Service. "About Form 2553, Election by a Small Business Corporation." Accessed March 7, 2024.
Internal Revenue Service. "S corporations." Accessed March 7, 2024.
Internal Revenue Service. "Form 2553.” Accessed March 7, 2024.
