Updated on: June 23rd, 2022

Form 2553 Instructions – What It Is & Why IRS Form 2553 Is Important?

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Small business entrepreneurs must register their company as a corporation with the Internal Revenue Service, which comes within the C Corporation category by default. When a business owner decides to file taxes as an S corporation, even if the company is a C corporation, IRS Form 2553 is necessary.

What Does Form 2553 Mean?

A business can submit Form 2553, Election by a Small Business Corporation, with the Internal Revenue Service to opt to be registered as an S Corporation rather than a C Corporation.

When a business registers as a corporation with the IRS, it is automatically designated as a C Corp. For a variety of reasons, including tax benefits, many business owners choose to be an S Corp instead.

C Corporations are sometimes subjected to double taxes, which can be costly for a small company. Income is taxable to the shareholders rather than the corporation in an S Corp.

Form 2553’s Purpose

The main purpose of IRS Form 2553 is for a small firm to register as a S Corporation rather than a C Corporation, which is the default. This is a tax form that most business owners fill out. S corporations save money on taxes since their taxable income is only taxed once to the owners.

S Corp owners report income and losses on their personal tax returns and are taxed at their individual rates. If dividends are paid out, C Corporations are subject to corporation taxes as well as shareholder taxes.

A corporation or other organization that is eligible to be treated as a corporation must utilize Form 2553 to elect to be an S corporation under section 1362(a). An entity that fulfills specified requirements and elects to be regarded as a corporation will be treated as a corporation as of the effective date of the S corporation election and will not be required to submit Form 8832, Entity Classification Election.

An S corporation’s revenue is often taxed on behalf of its shareholders rather than the corporation itself. An S corporation, on the other hand, may nevertheless owing tax on certain income. See Tax and Payments in the Instructions for Form 1120-S, U.S. Tax Return for further information. An S Corporation’s income tax return.


Who is Required to Submit Form 2553?

A small firm must fulfil specific conditions in order to be qualified to file Form 2553 to opt to register as a S Corporation. These conditions include:

  • The company or entity must be based in the United States.
  • The corporation’s stockholders must all be US citizens or residents.
  • The maximum number of stockholders is 100.
  • Individuals, estates, exempt organizations, and certain trusts are the only permitted shareholders.
  • There can only be one type of stock in the company.

The last criteria is that the company has adopted or will adopt one of the following tax years:

  • The fiscal year ends on December 31.
  • Year of natural business
  • Year of ownership taxation
  • Section 444-designated tax year
  • A 52-week tax year that finishes with a reference to one of the prior years listed.
  • Any other tax year in which the corporation (entity) creates a commercial purpose (including a 52-53-week tax year).

Certain organizations are not qualified to file Form 2553. These businesses include:

  • A bank or thrift organization that accounts for bad loans using the reserve approach.
  • A company that has chosen to be classified as a holdings company.
  • An insurance firm that is taxed under the Code’s section L
  • A local company that sells internationally

How Frequently Should I File Form 2553?

The election to be regarded as a S Corp stays valid once a small business submits Form 2553 and the IRS approves it. The business owner does not have to file Form 2553 every year.

This Form does, however, have a deadline and must be submitted on time to be effective for the current tax year. A company can file Form 2553 in one of two ways:

Option 1: The S Corp election must take effect no later than two months and fifteen days after the start of the tax year.

Option 2: The S Corp election can take effect at any moment during the previous tax year.

You do have several choices if you are late submitting Form 2553 but still wish to be an S Corp for the current tax year. You may be permitted to file Form 2553 late if you fulfil the following criteria.

  1. The company intended to register as an S Corporation before the deadline.
  2. The corporation was not prohibited from becoming an S Corp for any other reason; it was only because of the late filing that the corporation was disqualified.
  3. There is a valid justification for missing the deadline.
  4. The corporation presents statements attesting to the fact that all shareholders declared their income in accordance with the business’s desire to file as an S Corp.

Fill out and submit Form 2553:

The election must take effect no later than 2 months and 15 days after the start of the tax year, or

It is to take effect at any moment during the tax year before the tax year.

The 2-month period starts on the first day of the month in which the tax year begins and ends on the closing of the day before the numerically comparable day of the second calendar month after that month. If no equivalent day exists, use the end of the calendar month’s final day.

Example 1. There was no previous tax year. The first tax year for a calendar year small company entity begins on January 7. The two-month term expires on March 6, and the 15-day period concludes on March 21. To be classified as an S corporation for the first tax year, the company must submit Form 2553 between January 7 and March 21, 2019. An election made before January 7 will be invalid since the corporation had no previous tax year.

Example 2. Previous fiscal year. A calendar-year small business corporation has been filing Form 1120 as a C corporation, but for its upcoming tax year beginning January 1, it desires to make a Selection. The two-month period concludes on February 28 (29 in leap years), while March 15 is 15 days later. To become an S corporation for the next tax year, the corporation must submit Form 2553 between the start day (January 1) of its previous year as a C corporation and March 15th of the year in which it intends to become an S corporation. The corporation can make the election at any moment during the preceding tax year since it had one.

Example 3. The tax year is shorter than 212 months. On November 8, a calendar year small business entity begins its first tax year. The two-month term expires on January 7, and the 15-day period concludes on January 22. To become an S corporation for the first time in its short tax year, the company must submit Form 2553 between November 8 and January 22. An election made before November 8 will be invalid since the corporation has no previous tax year.


Cost of Filing Form 2553

Cost

The IRS does not charge a fee for filing Form 2553. However, certain unusual circumstances may result in a cost. If your firm uses “business purpose” to explain its fiscal year, for example, you would be charged a $5,800 fine after completing Form 2553.

This form cannot be submitted online and must be sent to the Internal Revenue Service via mail.

State taxes may apply depending on the state in which you conduct your business, and you may be required to file extra documentation with your state department. If you’re confused about the regulations governing your state taxes, you should see a corporation lawyer for help submitting the proper paperwork.


S Corporation Status Check

You can verify the status of your corporation after submitting Form 2553 by calling the IRS. The IRS will be able to tell you how far along your application is.

It normally takes 60 days for your corporation status to be determined after you submit your application. For a number of reasons, decisions can be postponed. You should contact the IRS directly if you believe your application has been delayed.


Election Relief for Late Voting

Relief for late S corporation elections and relief for late S corporation and entity classification elections for the same entity are discussed in the next two sections. See Rev. Proc. for additional procedural procedures when requesting relief for numerous late elections. 2013-30, section 4.04.

When filing Form 2553 for a late S corporation election, the corporation (entity) must write “FILED PURSUANT TO REV. PROC. 2013-30” in the top margin of the first page of Form 2553. If the late election is made by attaching Form 2553 to Form 1120-S, the corporation (entity) must write “INCLUDES LATE ELECTION(S) FILED PURSUANT TO REV. PROC. 2013-30” in the top margin of Form

If all previous Forms 1120-S have been submitted, the election can be filed with the current Form 1120-S. If submitted concurrently with any other overdue Forms 1120-S, the election can be attached to the first Form 1120-S for the year, including the effective date, or Form 2553 can be filed separately.


Relief for a Corporation’s Late S Corporation Election

A late election to become an S corporation is normally effective for the tax year beginning on the date stated online E of Form 2553. However, if the company can establish that the failure to file on time was due to reasonable cause, relief for a late election may be possible.

A company that satisfies the following standards must explain the reasonable cause for failing to timely file the election and its diligent measures to fix the mistake once it is discovered in order to get relief for a late election. Line I of Form 2553 or an attached statement can be used to convey this information.

  1. As of the date provided on line E of Form 2553, the corporation sought to be categorized as an S corporation.
  2. Because Form 2553 was not submitted by the required date (see When to Make the Election, earlier), the corporation fails to qualify as an S corporation on the effective date provided on line E of Form 2553.
  3. The corporation had sufficient grounds for failing to file Form 2553 on time and has worked tirelessly to fix the error since it was discovered.
  4. Within 3 years and 75 days after the date given on line E of Form 2553, the form will be submitted; and
  5. A corporation that meets requirements (1) through (4) must also be able to provide statements from all shareholders who were shareholders between the date entered on line E of Form 2553 and the date the completed Form 2553 is filed, stating that they have reported their income on all affected returns in accordance with the S corporation election for the year the election should have been made and all subsequent years. This requirement can be met by completing Form 2553, Part I, column K, Shareholder’s Consent Statement (or a comparable document attached to Form 2553); or
  6. If the following assertions are true, a company that fulfills criteria (1) through (3) but not a requirement (4) can nonetheless obtain relief for a late election on Form 2553.
  7. For the year in which the S corporation election should have been made, as well as any future tax years (if any), the corporation and all of its shareholders declared their income in accordance with S corporation status.
  8. It has been at least 6 months since the corporation filed its tax return for the first year in which it intended to be an S corporation; and
  9. The IRS did not notify the corporation or any of its shareholders of any problems with the S corporation status within six months following the timely filing of Form 1120-S for the first year.

When the foregoing conditions aren’t satisfied, the company must normally obtain a private letter ruling and pay a user charge in line with Rev. Proc. 2021-1, 2021-1 I.R.B. 1 (or its successor).


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Frequently Asked Questions: Form 2553

How can I tell whether my form 2553 was accepted?

Within 60 days of completing your application, the IRS will notify you with a decision. If the IRS has not contacted you within 60 days, you can contact them directly to enquire about your S Corp election application.


Important Takeaway

  • If you want your company to be recognized as an S Corporation for tax reasons, you must submit IRS Form 2553.
  • Form 2553 aids in the reduction of the tax burden.
  • Form 2553 must be submitted between two months and fifteen days of the commencement of the tax year for the S Corp election to take effect.
  • Form 2553 should be submitted at any point during the tax year prior to the start of the S Corp election.
  • If your company satisfies specific criteria, you may be exempt from late elections.
  • The corporation intended to be classified as an S corporation is an eligible entity; it does not qualify for an S corporation election because Form 2553 was not filed on time; there was reasonable cause for missing the deadline; or the corporation and all shareholders reported their income in a manner consistent with the corporation’s intent to file as an S corporation.
  • To be qualified for an S Corporation, your company must be a domestic corporation with no more than 100 qualifying shareholders, just one class of stock, and be an eligible organization.
  • The IRS website has Form 2553 accessible. You must first fill out the form online before printing it.
  • Form 2553 is broken into four components, each of which must be filled out thoroughly.
  • Part 1 of the form asks you to fill in basic information including the company’s name, address, and EIN (employer identification number).
  • Part 2 asks you to fill in information about the fiscal year.
  • Part 3 is solely applicable to trusts seeking S corporation status.
  • If you submit your application after the IRS deadline, you must complete Part 4 of the application.
  • In most cases, your Form 2553 is approved within 60 days after filing.
  • Yes, the rules for submitting Form 2553 differ per state.
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Ian Broderick is an avid author and owner of LLCGuys.com. He's been involved with the LLC formation field for over 4 years. On top of that, he has worked in several well-known LLC formation service providers. Now he decided to share his knowledge and advice with everybody. Since there are a lot of questions and concerns surrounding this field - his aim is to make LLCGuys a top-notch information provider in regards to LLC creation, service reviews and etc..

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