The IRS has so many different filing forms that it is not always easy to keep track of what is what. However, it is very important because filing errors can result in more taxes owed or potential fines and penalties.
Have you been told you need to file the IRS Form 2553? Learn everything you need to know about IRS Form 2553 and how to avoid filing errors with it.
What is the IRS Form 2553?
IRS Form 2553, Election by a Small Business Corporation, is a form used to designate your organization as an S corporation. A corporation or other eligible entity makes an election to become an SC corporation under section 1362(a).
Corporations are treated as C corporations unless they make the correct steps to become an S Corp.
Why would you want to become an S Corp over a C Corp? S corporations have net taxable income that is taxed to the shareholders of the corporation, and not the actual company or organization. Consequently, S Corps are able to avoid the “double taxation” imposed on C Corps.
Form 2553 is mandatory if an entity wishes to elect “S corporation” status under the Internal Revenue Code.
Who is eligible for “S Corporation” status?
In order to become a legitimate S Corp, you need to meet ALL of the following criteria:
- Represent a domestic corporation.
- All shareholders must meet certain shareholder requirements defined by the IRS in IRC Section 1361.
- The Corporation must have less than 100 shareholders.
- Provide only one class of stock.
- Not currently operate as an “ineligible corporation”. See IRC Section 1361 for more information.
Advantages & Disadvantages of S Corporations
As with anything in life, there are pros and cons to becoming an S Corp vs. C Corp.
● It Avoids “double taxation” resulting in less tax burden.
● It Reduces liability with a shield comparable to a limited liability company.
● It Provides owners with flow-through taxation.
● It imposes a limitation on more advanced capital structures.
● It creates a restriction on who can own shares in the corporation.
● It creates an ongoing eligibility requirement.
How to File IRS Form 2553
If you meet all of the criteria for eligibility and want to elect to become an S Corp, then you must complete and submit IRS Form 2553.
- Download Form 2553 from the IRS.
- Complete Form 2553 and make sure all the information is correct.
- File Form 2553 within 75 days of the date of incorporation for the newly formed entity.*
In order to remain compliant with the IRS, you must file Form 2553 on time. The IRS form must be filed no later than two months and 15 days after the beginning of the tax year that the S Corp election occurs to take effect.
*If you are already an established company, yet want to change the status of your entity, then Form 2553 needs to get filed at any time during the tax year preceding the tax year the status change went into effect.
Late Filing of Form 2553
Did you miss the deadline? Thankfully, relief is available for late elections, but only if certain conditions are met. You will want to make sure that:
● The corporation intended to be classified as an S Corp as of the intended effective date of the election.
● The corporation only failed to qualify as an S Corp because Form 2553 was not filed on time and for no other reason.
● The corporation had reasonable cause for missing the required deadline.
● The organization provided statements reflecting that every shareholder reported their income in a manner consistent with the company’s intention to file as an S Corp.
If all of the above conditions are met, you may receive a grace period from the IRS and still apply for S Corp status.
Get Assistance with Tax Filing Errors
No one likes to make filing errors with the IRS. Unfortunately, the agency is not forgiving when it comes to dealing with tax errors. It is why many corporations turn to the assistance of a qualified tax professional.
Levy & Associates has assisted countless corporations to navigate the narrow guidelines of creating an S Corp entity. We can help you complete the appropriate IRS forms like Form 2335, as well as reduce taxes owed that are the result of filing errors.
Let us help you with your taxes and forms. Reach out to us at 800-TAX-LEVY, or visit www.levytaxhelp.com for more information.