What Is IRS Form 2553?
Form 2553 is a tax form used by eligible small businesses to elect S corporation status with the IRS. Filing this form allows corporations, LLCs, or other qualifying entities to be taxed as an S corp, which helps avoid double taxation by passing income, losses, and credits directly to shareholders. This election must be submitted within a specific timeframe—generally within 75 days of incorporation or by March 15 of the tax year in which the election is to take effect.
Who Should File Form 2553?
Businesses that want the benefits of S corporation tax treatment should consider filing Form 2553. The entity must meet certain IRS criteria: it must be a domestic corporation, have no more than 100 shareholders (all of whom are individuals, certain trusts, or estates), and issue only one class of stock. LLCs must first file Form 8832 to be taxed as a corporation before electing S corp status with Form 2553.
Why Elect S Corporation Status?
S corporation election can offer tax advantages for qualifying businesses. It avoids the corporate income tax and allows shareholders to report business income on their individual tax returns. This can result in lower overall tax liability and reduce exposure to self-employment taxes. However, it also comes with stricter compliance rules, including limitations on ownership structure and mandatory officer salaries.
How to File Form 2553
To file Form 2553, businesses must complete and submit it to the IRS, either by fax or mail, depending on their location. The form includes details like the business name, EIN, date of incorporation, and shareholder information. It also requires the signature of all shareholders. Late elections may be accepted if reasonable cause is provided.
Things to Keep in Mind
Businesses must stay compliant with all S corp eligibility rules to maintain their tax status. Failure to do so may result in revocation by the IRS. Additionally, the business must continue to file the correct tax forms, such as Form 1120-S for annual tax reporting.
