Business owners looking to elect S corporation status can agree that navigating IRS form 2553 can be complicated.
By following a step-by-step guide, you can clearly understand how to properly fill out and file this important form to elect S corp status and reap the tax benefits.
In this article, you'll learn eligibility requirements for S corps, the timeline for filing form 2553, how to correctly complete each section, common mistakes to avoid, and where to submit the final paperwork to the IRS for approval.
Introduction to Form 2553: Electing S Corp Status for Small Businesses
Form 2553 is used by small business corporations to elect S Corp status under Subchapter S of the Internal Revenue Code. This designation provides certain tax and legal benefits.
Understanding the Role of Form 2553 in S Corp Election
Form 2553 allows a corporation to elect treatment as an S Corp for federal income tax purposes. An S Corp is a pass-through entity, meaning profits and losses pass through to the shareholders' personal tax returns. This avoids double taxation on corporate income.
To elect S Corp status, a corporation must file a completed Form 2553 with the IRS within 2 months and 15 days after the beginning of the tax year the election is to take effect. This deadline is important for qualifying for S Corp status.
Eligibility Criteria for S Corp Election
To qualify for S Corp status, a business must:
- Be a domestic corporation
- Have 100 or fewer shareholders
- Have only one class of stock
- Have shareholders who are U.S. citizens or residents
- Not be an ineligible entity (e.g. certain financial institutions, insurance companies)
Additionally, an S Corp cannot have:
- A nonresident alien as a shareholder
- A corporation or partnership as a shareholder
Meeting these shareholder and organizational requirements allows a corporation to elect S Corp status by filing Form 2553.
Advantages of Electing S Corp Status
Key benefits of S Corp status include:
- Avoidance of double taxation on corporate income
- Pass-through taxation where S Corp income is only taxed at the shareholder level
- Ability for shareholders to offset S Corp losses against other personal income
- Exemption from federal income taxes at the corporate level
S Corp status also provides limited liability protection for shareholders while allowing pass-through tax treatment.
Timeline and Deadlines for Filing Form 2553
To file for initial S Corp election, Form 2553 must be filed by:
- New corporations: Within 2 months and 15 days after the beginning of the tax year the election is to take effect
- Existing corporations: On or before the 15th day of the 3rd month of the tax year the election is to take effect
If the deadline is missed, the IRS may grant late S Corp election using Form 2553, within 6 months of the original deadline for electing S Corp status.
Meeting the filing deadlines properly and eligibility criteria allows small businesses to benefit from S Corp status.
How do I file an S Corp election with the IRS?
To become an S corporation, you must file Form 2553, Election by a Small Business Corporation, with the IRS. Here is an overview of the key steps:
1. Complete Form 2553
- List all shareholders and their ownership percentages on Form 2553
- Have all shareholders sign and date the form
- The corporation must meet all eligibility requirements to elect S corp status
2. File By the Deadline
- File Form 2553 by the 15th day of the 3rd month of the tax year you want S corp status to take effect
- If you miss the deadline, you can request late S corp election using Form 2553
3. Mail Form 2553 to the IRS
- See the Instructions for Form 2553 for exact mailing address
- Send via certified mail with return receipt for proof of timely filing
4. Receive IRS Acceptance Letter
- You will receive a confirmation letter from the IRS indicating your S corp election was accepted
- Retain this letter for your records going forward
Be sure to plan ahead and file Form 2553 on time to avoid missing the deadline for S corp election. Pay close attention to the instructions for all filing details.
How long does it take for form 2553 to be approved?
The IRS typically processes Form 2553 within 60 days of receipt. Here is an overview of the timeline:
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Submission: After completing Form 2553, mail it to the IRS. Be sure to include all required information and documentation. Retain a copy for your records.
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IRS Review: The IRS will review your election submission within 60 days. They will determine if your S corporation election is valid based on eligibility rules.
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Approval/Denial: If approved, the IRS will officially accept your S corporation status. You will receive notification. If denied, the IRS will explain why and provide next steps.
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Follow Up: If you do not receive confirmation within 60 days, follow up directly with the IRS at (800) 829-4933. Calling allows you to check the status and resolve any issues delaying processing.
The key is submitting a complete and accurate Form 2553. Providing all required information upfront enables faster IRS review and approval. If needed, consult a tax professional for guidance filing the S corporation paperwork properly the first time. Be diligent following up within 60 days if you do not receive confirmation.
Should I mail or fax form 2553?
Generally, you should send the original Form 2553 election (no photocopies) by mail or fax it to the Internal Revenue Service Center.
Here are the key points on mailing or faxing Form 2553:
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Mail: Send the original Form 2553 (no photocopies) to the IRS Service Center listed in the instructions for your location. Keep a copy for your records. Mailing is the preferred method.
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Fax: You can fax Form 2553 to the specific IRS fax number listed in the instructions. However, you must still keep the original form with your permanent records.
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When faxing, be sure to:
- Include a cover sheet with the corporation's Employer Identification Number (EIN) and "Form 2553 Election" listed
- Verify the fax number in the Form 2553 instructions for your location
- Keep the original Form 2553 on file
So in summary, you can choose to mail the original Form 2553 or fax it, but if you fax you must retain the original in your permanent corporate records in case further verification is needed. Mailing the form is generally the recommended approach.
How much does it cost to file form 2553?
Filing IRS Form 2553 itself does not have a fee. However, there can be some costs associated with electing S corporation status after filing this form:
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Business purpose fiscal year fee: If the company is using a "business purpose" to justify having a fiscal tax year instead of a calendar year, it will need to file Form 1128 and pay a user fee that is currently $5,800. This would apply after filing Form 2553.
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Accountant fees: While Form 2553 can be filled out yourself, many businesses choose to have their accountant or tax professional handle it. Average fees for an accountant to file this form on your behalf range from $200-500.
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State filing fees: You may need to file additional paperwork and pay state fees when electing S corp status, depending on your state's requirements. These fees vary by state but are typically $100-500.
So in summary, while IRS Form 2553 itself does not require a fee, expect to budget approximately $200-500+ when factoring in potential fiscal year election and professional service fees. The total costs will depend on your specific situation.
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Preparing to File Form 2553: Information and Documentation
Filing Form 2553 to make an S corporation election requires gathering key details about your business and documentation to support the election. Here is what you need to know:
Gathering Required Business Details
To complete Form 2553 accurately, have these business details ready:
- Employer Identification Number (EIN)
- Business activity codes
- Date of incorporation
- Accounting period and tax year
Document your business structure, ownership percentages, names and tax IDs of owners/shareholders.
Consent Statement of Shareholders
Unanimous consent of shareholders is required to file Form 2553. Document this by:
- Having all shareholders sign Form 2553, or
- Attaching separate shareholder consent statements to Form 2553
Consent statements must include name, address, tax ID, ownership percentage.
Selecting a Fiscal Tax Year
You can choose a tax year other than the calendar year when filing Form 2553, known as a fiscal tax year. Options include:
- Calendar tax year (Jan 1 - Dec 31)
- Fiscal tax year (e.g. Jul 1 - Jun 30)
The fiscal tax year impacts when you file Form 1120-S each year. Choose wisely based on business needs.
Qualified Subchapter S Trust (QSST) Requirements
If an S corp has shareholders that are trusts, they must meet QSST criteria:
- Only one income beneficiary
- Beneficiary must distribute all taxable income annually
- Other specific IRS requirements
Document trust details. Consult a tax professional to ensure QSST eligibility.
Having this information and documentation in order makes filing Form 2553 smooth and helps avoid processing delays.
Completing Form 2553: Step-by-Step Instructions
Form 2553 Fillable Sections Overview
The fillable Form 2553 contains several key sections that must be completed accurately to ensure a valid S corporation election:
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Section A: Enter general information like the corporation's name, address, EIN, and accounting period dates. This identifies the entity making the election.
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Section B: List the effective date of the S corporation status if different from the filing date. This date determines when S corporation taxation begins.
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Section C: Provide shareholder consent statements with names, addresses and stock owned percentages. All shareholders must consent.
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Section D: Enter the number of shares issued and outstanding for each class of stock. S corps can only have one class of stock.
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Section E: List any subsidiaries the corporation owns. Subsidiaries may need to file separate elections.
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Section F: Provide signatures, titles and dates from authorized officials like the president, treasurer, etc.
Properly filling each section ensures the IRS accepts your S corporation election.
IRS Form 2553 Online Submission Process
The IRS does not currently offer an option to file Form 2553 electronically. The form must be physically signed by authorized officials and mailed to the IRS address listed on page 2 of the instructions. Filing online can speed up processing but the IRS requires paper submission.
Some benefits of online filing include:
- Faster processing than paper forms that must be manually entered
- Error checking before submission to prevent rejections
- Easier tracking with electronic confirmation of acceptance
- Greater accessibility for officials needing to sign the form
While Form 2553 cannot yet be filed electronically, other business tax forms like the 1120-S can be. Check the IRS website for the latest on online filing options.
Completing Entity Classification Election on Form 2553
To properly complete the entity classification election section of Form 2553:
- Enter the legal name of the eligible entity electing S corporation status
- Provide the entity's EIN to identify the correct business
- Check the box to indicate the entity is electing to change classification to an S corporation
- Enter the effective date for the desired S corporation status
- Include any additional information required in the instructions
Properly completing this section ensures the entity classification election to become an S corp is valid. Form 8832 is not required when electing S corp status on Form 2553.
Addressing Common Mistakes on Form 2553
Filers often make minor yet critical mistakes on Form 2553 that lead to rejection and delays. Avoid these common errors:
- Forgetting shareholder consent statements or signatures
- Listing invalid stock classes besides one class of common stock
- Providing incorrect effective dates that do not match accounting periods
- Missing subsidiary information for partially-owned businesses
- Entering inconsistent names, EINs, or dates across sections
Carefully reviewing Form 2553 instructions and checking for errors can help avoid these frequent mistakes. Consulting a tax professional when unsure also minimizes rejection likelihood. Taking time ensures accurate filing the first time.
Submitting Form 2553 to the IRS
Submitting Form 2553 is an important step in electing S corporation status for your business. Here are some key methods and tips for ensuring successful submission to the IRS:
IRS Form 2553 Download and Print Instructions
Form 2553 can be downloaded from the IRS website. The form should then be printed and filled out according to the instructions. Be sure to use the latest version of the form.
Key steps:
- Download Form 2553 PDF from IRS site
- Print 2 copies - 1 for IRS, 1 for your records
- Use black ink to fill out the form neatly and clearly
Where to Mail Form 2553: IRS Mailing Addresses
The completed Form 2553 should be mailed to the appropriate IRS address based on your entity type:
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Corporations:
Department of the Treasury
Internal Revenue Service Center
Ogden, UT 84201 -
LLCs:
IRS Center
Attn: EIN Operation
Cincinnati, OH 45999
Mail the form via certified mail with return receipt for tracking purposes.
Using the Form 2553 Fax Number for Submission
Form 2553 can alternatively be faxed to the IRS at:
Fax: 855-214-7523
When faxing:
- Include a cover sheet with number of pages
- Print forms directly from IRS site to ensure latest version
- Retain fax confirmation as proof of timely filing
Confirming Receipt and Approval of Form 2553
To confirm the S corporation election was received and approved:
- Call 800-829-4933 to verify receipt
- Check online account transcript for processing updates
- Watch for IRS Notice of Acceptance in the mail (Letter 2458B)
Be sure to keep copies of all submissions and IRS communications regarding the status of your Form 2553.
Managing S Corp Status: Compliance and Reporting
Maintaining S Corp status comes with important ongoing tax and legal obligations. Failing to meet these requirements can jeopardize the S Corp election and lead to penalties.
Annual Tax Return Requirements: Filing Form 1120-S
- S Corps must file Form 1120-S annually to report income, losses, deductions, credits, and other tax items. This form is due by March 15.
- Shareholders must report their share of these S Corp tax items on their personal returns, using Schedule K-1.
- Late filing of Form 1120-S can result in penalties.
Understanding Self-Employment Tax Implications for S Corps
- S Corp income passed through to shareholders is subject to self-employment tax, similar to sole proprietors.
- Exceptions apply for shareholders who are not active in the business. Consult a tax professional to understand how this impacts your situation.
Handling Changes: Revoking Subchapter-S Election
- To revoke S Corp status, file Form 2553 again and select the termination box.
- Revocation is effective on the first day of the following tax year. All shareholders must consent.
- There are restrictions on re-electing S Corp status immediately after revocation.
Qualified Subchapter S Subsidiary Election and Form 8869
- S Corps can own other corporations if they are qualified subchapter S subsidiaries (QSub) by filing Form 8869.
- The QSub is not treated as a separate corporation, and all income/losses are reported on the parent S Corp return.
Troubleshooting and Resolving Issues with Form 2553
Correcting Errors on Form 2553 After Submission
If you discover errors on your Form 2553 after submitting it to the IRS, you should file an amended return as soon as possible. Here are the steps to take:
- Review the errors carefully and determine the necessary corrections
- Complete a new Form 2553 with the correct information
- Write "Amended" clearly at the top of the new form
- Submit the amended form to the IRS
The IRS will process the amended return and update your S corporation status accordingly. It's important to correct errors promptly to avoid potential tax complications or penalties. Contact the IRS directly if you have any questions about amending your Form 2553.
Late Corporate Classification Election Relief
If you missed the filing deadline to make an S corporation election, the IRS may grant relief through late corporate classification election procedures:
- File Form 2553 as soon as possible after you discover the missed deadline, along with a statement explaining the reason for the late filing
- The IRS will review the request and issue a determination on whether relief is granted
- If approved, the late election is treated as if filed on time
Relief may be granted in cases of reasonable cause, such as death, illness, or erroneous tax advisor advice. Each request is evaluated on a case-by-case basis. Keep records proving the reason for late filing to support your request.
Dealing with IRS Inquiries and Audits
If you receive an IRS inquiry letter or get selected for an audit related to your Form 2553, stay calm and take the following recommended actions:
- Carefully review the letter and understand specifically what information the IRS is requesting
- Gather all relevant documentation like prior tax returns, bank statements, meeting minutes, etc.
- Consult a tax professional to assist with responding accurately and completely
- Draft a detailed response letter addressing the IRS requests
- Include copies of supporting documents as requested
- Submit your response by the deadline given to avoid penalties
Being responsive and transparent is key - provide clear explanations and documentation to demonstrate full compliance.
Late Corporate Classification Election Representatives
Businesses can authorize representatives to interact with the IRS when making a late S corporation election. Typical responsibilities include:
- Advising clients on eligibility for late election relief
- Preparing and submitting Form 2553 on the business's behalf
- Drafting statement detailing the reason behind the late filing
- Communicating with the IRS throughout the determination process
- Updating clients on the status of their relief request
- Helping clients understand and comply with IRS determination
Choosing an experienced representative is highly recommended when seeking late corporate classification relief. They guide clients through the complex procedures and ensure accurate filings to improve chances of a favorable outcome.
Conclusion: Ensuring Successful S Corp Election with Form 2553
Filing Form 2553 to elect S corporation status can provide valuable tax benefits, but the process must be handled carefully to avoid missteps. This conclusion summarizes key points to ensure your S corp election goes smoothly.
Final Checklist for Form 2553 Submission
Before submitting Form 2553, double check that you have:
- Completed all required fields and forms accurately
- Signed and dated the forms
- Attached any necessary supporting documents
- Mailed the complete packet to the proper IRS address by the deadline
Following this checklist helps prevent rejections or processing delays.
The Importance of Maintaining S Corp Compliance
Even after election approval, S corps must remain compliant with IRS rules to retain their special status, including:
- Filing Form 1120S tax returns annually
- Issuing K-1 reports to shareholders
- Maintaining records of shareholder basis amounts
- Tracking built-in gains if the S corp was formerly a C corp
Staying current on all admin, record-keeping, and reporting requirements is crucial for ongoing qualification as an S corp. Consult a tax professional with any questions.
Accurately filing Form 2553 is just the first step to realizing the benefits of S corp status. Maintaining compliance and understanding the continuing obligations are also key to making this election work for your small business.
