When you form a new business entity, a corporation or LLC, the Internal Revenue Service (IRS) will by default decide how your business entity is taxed. However, you’re allowed to elect S-corporation status for your new business when you fill the IRS Form 2553. Our team has compiled everything you need to know about how to fill out Form 2553.
How to Fill Out Form 2553?
First and foremost, you will need to fill out Form 2253 to start your election as an S-Corp. By default, the IRS will file your business as a C-corporation. But by filling Form 2553, you can make an election with the IRS in order to have your business entity recognized as an S corporation.
Our team notesthat your business must first be filed in the state where it will conduct most of its operations before you make the election.
What is Form 2553?
Before delving into how to fill out Form 2553, it is important to know what Form 2553 is. Form 2553 enables you to partake in the S corporation election, which is a tax designation granted through the IRS that may reduce your taxable income.
The form notifies the IRS that you want to be elected as an S-corporation. After undergoing receipt and review of your form, the IRS will send a letter to your business confirming or denying your business’ election request. If your request for S-Corporation tax treatment is confirmed, you will be able to save money on small business taxes.
Form 2553 is due no later than two months and a half after the beginning of the tax year in which the election takes effect. As an S-corporation, your business is taxed as a pass-through entity, so the income and losses of your business are reflected on your personal tax returns.
Businesses That Can File Form 2553
To file Form 2553 with the IRS, your business must meet the IRS’s eligibility criteria for an S-corporation. Businesses that can file Form 2553:
- Must be a domestic corporation
- May not have more than 100 qualifying shareholders
- May not have shareholders that are non-resident aliens, partnerships, or corporations.
- May only have one class of stock
- Cannot be ineligible to be a corporation
Filling Out Form 2553
After identifying the qualifications for Form 2553, our team will explain in detail a step-by-step guide to filling out the form.
Part 1: Election Information
Part 1 requires basic information about your business, such as business name, address, EIN (if applicable), filing state, data or incorporation, and more. This part is divided into many items. Item E of Part 1 requires you to enter the date you want your S-corporation tax election to take effect.
For this part, you will be required to write down your fiscal year for your business. The second part of Part 1 involves writing down the contact details and information for your attorney or business officer. This will allow the IRS to reach out to them if they need to clarify the details of what you have filed.
Finally, Part 1 has a space to document each shareholder’s details and their consent to S-corporation tax treatment. However, the space provided is only enough for 7 shareholders. You would need to affix an extra sheet if you have more shareholders.
A principal company officer must attach their signature at the end of Part 1. If you’ll be filing this form late, you would have to explain the reason for the delay in item I of Part 1.
Part 2: Selection of Fiscal Year
Most businesses use the normal calendar (January 1 to December 31) as their fiscal year. If you’re one of them, then you don’t need to fill out this section. Otherwise, you’ll need to complete Part 2 of Form 2553. This part essentially justifies why the IRS should allow you to use a non-calendar tax year.
Part 3: Qualified Subchapter S Trust (QSST) Election
If you’re wondering what a Qualified Subchapter S Trust (QSST) is, it is a trust that has only one beneficiary. And under IRS rules, the beneficiary must receive the amounts earned at least once a year. Spouses can be considered as one beneficiary if they file a joint tax return.
You must fill out Part 3 if you are a QSST that owns any stock in an S-Corporation on or before the date that the corporation makes its election to be an S-Corporation [1].
For this reason, many small businesses typically do not need to fill out Part 3 of Form 2553. However, you may want to discuss with your accountant or attorney whether you need to fill out this section.
Part 4: Late Corporate Classification Election Representations
Any business that is filing their IRS Form 2553 late and past the deadline must fill out this section. Typically, you have to file Form 2553 within 75 days of the start of your tax year if you want to qualify for S-Corporation status in the same year.
You will need to sign and indicate your agreement with the representations set out in part 4 of Form 2553. Make sure you read the representations carefully or you might not be able to claim late election relief.
You’ll also need to attach a statement about the reason why you filed your Form 2553 late. Alternatively, you can write this in Part 1.
Submission and Approval of Form 2553
After filing your Form 2553, it’s time to submit it to the IRS. You can either mail or fax the form to the appropriate IRS center for your state. Always check the IRS website for the most up-to-date information about how to submit the form.
There’s no fee required to submit the form, but in specific situations like if you choose a non-calendar fiscal year (a business purpose fiscal year), the IRS will assess a $5,800 fee. Filing after the IRS deadline may also incur a late fee.
After submission, you should hear a response from the IRS within 60 days. You may need to wait an additional 90 days if you choose a non-calendar fiscal year. The IRS will inform you via mail whether your request for S-Corporation tax status is accepted or rejected. Be sure to keep your approval letter (CP261 Notice) in your files.
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FAQ
Can Form 2553 be filed electronically?
No, Form 2553 cannot be filed electronically. The form can only be filed by mail or fax as there is no online submission. The mailing address varies depending on your filing state. Check the IRS website for the most up-to-date information about how to submit the form.
How do I know if my form 2553 was approved?
You will know that your Form 2553 was approved when you receive the CP261 Notice with your approval letter via mail to your business address. This usually happens within 45-60 days of submission of Form 2553. If your request is also rejected, you’ll be informed by the IRS via mail. Once your request for the S-Corporation status is approved, it stays in effect until your business dissolves or changes its tax status.
Conclusion
There are a few steps involved in starting your election as an S-Corporation. However, our team deem it is best that you form your business entity with your desired state of operation and your formed business must be eligible for S-Corporation status before filling the form.
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