IRS Form 2553, Election for a Small Business Corporation, is filed by a corporation or other entity eligible to make an election to be an S corporation under section 1362(a). Corporations are treated as C corporations unless proper steps are taken to become an S corporation. Here’s a quick look at what you need to know if you’re helping a small business client who wants to make an S corp election. .
Why you would want to file Form 2553
A significant benefit of choosing to become an S corporation is that the net taxable income of an S corporation is generally taxed to the corporation’s shareholders, not the corporation itself. Income is shown on shareholders’ personal statements and is taxed at their personal tax rates. S corporations can also write off initial losses.
Also, the net income of an S corporation is only taxed once. C corporations, on the other hand, can potentially be taxed twice: at the corporate and shareholder level if dividends are paid.
Who qualifies to make an S-Corp election
As great as an S corp election may seem, not all small business customers will qualify to make the election. There are quite a few requirements that a business must meet to qualify. Those requirements include:
- The business is a corporation or household entity.
- All shareholders are US citizens or residents. There are no non-resident shareholders.
- There are no more than 100 shareholders. Members of a family may be treated as a shareholder in this count.
- The only shareholders are individuals, estates, certain exempt organizations, or certain trusts.
- The company has only one class of shares.
- The business has changed or will change to one of the following fiscal years:
- A fiscal year ending on December 31
- One calendar business year
- One tax year of ownership
- A fiscal year elected under section 444
- A fiscal year of 52 to 53 weeks ending with reference to a year named above
The business must also not be one of the following ineligible corporations:
- A bank or savings institution that uses the reserve method to account for bad debts under section 585.
- An insurance company subject to tax under subchapter L of the Code.
- A corporation that has elected to be treated as a holdings corporation under section 936.
- A National International Sales Corporation (DISC) or former DISC.
Also, Form 2553 must be filed on time. If you file late, you have some relief options that we’ll talk about later in this post.
For more detailed information on the requirements to make an S corp election, you can refer to the IRS Form 2553 Instructions.
Form 2553 due date
In order for Form 2553 to be filed on time, you must file:
- Prior to two months and 15 days after the beginning of the current fiscal year in which the S corp election will take effect
- If you want to become an S corporation in 2023, the deadline is March 15, 2023
- At any time during the fiscal year preceding the fiscal year, the S corp election will take effect
Model 2553 late submission
Relief is available for late elections, but only if several conditions are met, including:
- The corporation intended to be classified as an S corporation as of the scheduled effective date of the election.
- The corporation had reasonable cause for missing the deadline.
- The corporation provides statements reflecting that each shareholder reported their income consistent with the corporation’s intent to register as an S corporation.
Again, you should review the IRS resources and instructions for Form 2553 to make sure your client meets all the requirements for late election relief. If they qualify, you must file Form 2553 with SUBMITTED PURSUANT TO REV. PROC. 2013-30 written at the top and attach a statement explaining reasonable cause. Form 2553 and the statement must be signed by each shareholder.
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