Form 2553 Instructions: Everything You Need to Know
Form 2553 instructions is a necessary step in order to qualify as an S-corporation. Its title is “Election by a Small Business Corporation”. 9 min read
Updated November 10, 2020:
Form 2553 instructions are a necessary step to qualify as an S-corporation. Its title is “Election by a Small Business Corporation”. Once it’s complete Form 2553 you submit it to the Internal Revenue Service. Simply put, by filling out and submitting for 2553 an entity is stating its intent to become an S corporation. As with all forms that need to be submitted to the IRS, it needs to be done promptly (within 75 days of formation).
By default, all corporations are treated as C-corporations for tax purposes. The tax consequences for this default is that the corporation would pay corporate income tax on net taxable income annually. The way to avoid this is to fill out Form 2553 and make the intention to become an S-corporation clear. The IRS will respond to the corporation with a letter confirming the election for S-corporation but the organization must be incorporated first.
The organization must draft articles of incorporation, by-laws, and various legal documents to form and operate the business. Each state has different requirements for the incorporation process so research should be done on the state in which the organization wishes to incorporate it. Typically, an organization would incorporate in the state where it will conduct most of its business. The corporation should verify that its eligibility for S-Corporation status was met and file Form 2553 with the Internal Revenue Service. Download Form 2553 here from the IRS website.
Part 1 in filling out Form 2553
First things first: the corporation’s name and the mailing address should be filled out. The mailing address is not necessarily the address where the organization will do the bulk of its business. An Employer Identification Number (EIN) is something for which you’ll need to apply if you don’t already have one. EINs can be issued immediately by going online here. Next, fill out the state of incorporation and the incorporation date. If the company’s name and/or address has changed since the EIN was applied for, then item D will need to be marked. If the address and name have remained the same then D can be left blank. New corporations will have to fill out item E as the date it was incorporated. Item F will usually be marked 1 for the calendar year. The corporation’s tax professional or attorney may have a different suggestion on item F so they should be consulted. Item G is regarding shareholders, which unless the corporation exceeds 100 shareholders, will be left blank. The exception to the 100-shareholders rule is if several of the shareholders are members of a single-family. A person and that person’s spouse can be designated as one shareholder. Members of a family (all members of a common ancestor) and their estates can be designated as one shareholder. Spouses count too (even former spouses) of a common ancestor or anyone in the lineal descendant’s spouse category (current or former). Finally, enter the title and name of one of the corporation’s officers, any executive such as the CEO, president, CFO, vice president, controller, or any officer authorized to sign. The signature and date must appear at the bottom of page 1.
All Stockholders generally need to be listed for a new corporation on column J. Column J must only include current shareholders who will hold stock when the election is made (this is helpful when filing before the date it becomes effective). However, any former stock owning shareholders must also be listed when filing on the election date or after the election date. Column K is for each shareholder to date and sign. If a shareholder as with all property, spouses may have a community property interest. If this is the case then both must represent their consent to elect S-corporation status by signing and dating in column K. The quantity of shares should go in column L, alternatively, the owner percentage and the date the shares were acquired. The person(s) named in column J lists their EIN or social security number in column M. In column N, confirm that the tax year concludes for the corporation on December 31.
Large Number of Shareholders
Sometimes the number of shareholders exceeds the ability to list them on this page. The answer is to attach an additional page with the information of the additional shareholders. Their constant statement with date and signature, their address and name, their percentage or quantity of shares, the date they acquired their shares, their EIN or social security number, and the confirmation of the tax year should all be included on this separate page.
Skipping Part II
The second portion of the form does not need to be completed if the calendar year was selected for your tax year on page 1 (Item F). If option 3 was selected then this section may also be skipped.
Skipping Part III
Unless you are a QSST Part III can be skipped (hint: Qualified Subchapter S Trust).
Skipping Part IV
A new corporation can skip Part IV if filing within 75 days of the formation of the organization.
For State Taxes
Additional documents may need to be filed with local taxation authorities (for example, the state) to be treated as an S-corporation for the purposes of state taxes.
The Benefits of Choosing S-Corporation Status
While the income of a C-corporation has the potential to be taxed twice, the first time at the corporate level and the second at the shareholder level (this would occur if dividends were paid) S-corporations have no such “double-jeopardy”. The S-corporation’s income is taxed once and only once at the shareholder level.
When to Submit Form 2553
The organization should submit Form 2553:
- 2 months and 15 days past the start of the tax year in which the election is to be effective. If the organization adheres to the calendar year this date is March 15.
- If the tax year is only going to last less than 2 months and 15 days then Form 2553 must be filed in the 2nd month on the 15th day of the tax year.
- Form 2553 can be filed at any time before the year in which the election is to take effect.
- If you obey the instructions for “Late S-corporation Election” you can file later than these deadlines.
Procedures for Late Elections for S-Corporation Status
Some may be surprised that (in some circumstances) a corporation may file Form 2533 after the due date and still get approval from the Internal Revenue Service to make the election effective retroactively to the start of the corporation's tax year. The IRS will consider the S-corporation election effective for the next tax year but not effective for the past tax year if the form is filed after the fifteenth day of the 3rd month of the corporation’s tax year but before the fifteenth day of the 3rd month of the next year. In order to make a late election, the corporation must ensure that its appropriate for that corporation. The corporation must have made its intentions to be classified as an S-corporation (and meet all of the criteria for eligibility) as of the intended effective date. The test is that the only reason that the corporation failed to be qualified as an S-corporation is that it didn’t file the required form (2553) in time. The corporation cannot have failed to qualify as an S-corporation for another reason. In addition, the corporation must be able to show a “reasonable” cause for failing to file the form in a timely manner. Accidentally or unintentionally failing to get Form 2553 to the Internal Revenue Service is reasonable for the purpose of cause. Statements will have to be provided from all shareholders that they have reported income in a way that is consistent with the corporation’s intentions. Should these requirements all be met, then the corporation can write “FILED PURSUANT TO REV. PROC. 2013-30” on their Form 2553. The failure to file Form 2553 by the appropriate time needs to be addressed by the corporation in an attached statement that demonstrates that there was a “reasonable” cause for failing to file Form 2553 with the IRS in a timely manner. All shareholders will need to sign the in-depth explanation for the corporation’s failure to file on time, and Form 2553.
To clarify what is “reasonable” the Internal Revenue Service states that they will carefully consider the corporation's reasons for a late filing of Form 2553. They go on to say that they are looking to see that the corporation has exercised “ordinary business care and prudence to meet federal tax obligations” even though the corporation failed to file on time. Each incident will be weighed solely on its merits to determine whether penalties apply. What are the questions that the Internal Revenue Service asks in order to determine the “reasonableness” of the failure to file Form 2553 in a timely manner?
- What happened?
- When did it happen?
- What prevented the taxpayer (corporation) from complying?
- How did the fact pattern result in the failure?
- What else was happening for the taxpayer (corporation)?
- How did the taxpayer (corporation) attempt to comply once circumstances were altered?
Any statement by the corporation should address each of these questions in order to make “reasonable” cause apparent.
Importance of Form 2553
As the vehicle through which corporations can reduce the amount of taxes that they have to pay, Form 2553 is very important. The corporate tax rate is 35%, when a corporation is qualified as an S-corporation (through Form 2553) a corporation becomes a pass-through entity for the purposes of taxes. This means that the money that your company earns passes through to the shareholders' pre-tax only to be taxed at an individual’s income tax rates. Paying taxes once as opposed to twice (as in a C-Corp).
A common situation for single-member Limited Liability Companies (LLCs) is that they would like to be qualified as an S-corp for tax purposes. For more on Limited Liability go here. Form 8832 comes into play when that non-corporation has not filed the necessary paperwork within the appropriate timeframe. In this situation, Form 2553 needs to be retroactively filed with Form 8832 as a supplement. This will allow the LLC to be considered for retroactive classification as an S-corporation. There are three criteria that must be met to qualify as eligible for relief:
- The company must have met the criteria to be classified as an S-corporation on the intended effective date.
- The domestic company, which is something other than a corporation (LLC for example), would have qualified if it had filed Form 8832.
- Failure to file Form 2553 on time is the only reason the entity is not a corporation and the failure is deemed “reasonable”.
How Long Does it Take for Form 2553 to Get Approved?
Within 2 months the Internal Revenue Service will approve a Form 2553 filing, provide all the requirements are met. Some states do not recognize the Internal Revenue Service’s Form 2553 for state income tax, so in those states, a local form must be filed with the state tax authority.
Who may Elect?
There are tests to determine if a corporation may be qualified as an S-corporation. Go here for more on the election of S-corporation. All of the following tests must be met to be qualified as an S-corporation:
- The corporation must be domestic.
- The corporation must have 35 shareholders or fewer (spouses are treated as one shareholder for this) Everyone else is treated as one shareholder.
- The corporation must have only certain trust, estates, or individuals as shareholders.
- The corporation has no nonresident aliens as shareholders.
- The corporation only has one class of stock (with no regard for the difference in voting rights).
- The corporation doesn’t own 80% (or more) of the stock of another company that is conducting business and has gross income.
- The corporation isn’t a thrift institution or a bank.
- The corporation is not an insurance company (which would make it subject to the tax under the rules of Subchapter L of the tax code)
- The corporation has not elected to utilize the section 936 treatment as a possessions corporation.
- The corporation is not a current or former DISC (domestic international sales corporation).
- The corporation fulfills the requirements of section 1378 or has elected to have a tax year other than a permitted tax year under section 444.
- The corporation has the consent of each and every shareholder.
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