IRS Form S Corp Election: Everything You Need to Know
IRS Form S Corp Election is an effective way for C corporations and LLCs to save money and time with an annual tax filing deadline and pass-through taxation.3 min read
2. Advantages of IRS Form S Corp Election
3. Disadvantages of IRS Form S Corp Election
4. Frequently Asked Questions About IRS Form S Corp Election
5. Steps for IRS Form S Corp Election
What is IRS Form S Corp Election
IRS Form S Corp Election is an effective way for C corporations and LLCs to save money and time with an annual tax filing deadline and pass-through taxation. This means that the business's income is passed to shareholders without being subjected to a corporate tax. To do this, businesses need to fill out IRS Form 2553 for S Corp election.
Advantages of IRS Form S Corp Election
- S corporations have liability protection since these business entities remain separate from owners.
- Business owners pay less in self-employment taxes on total profits.
- S corporations avoid being taxed twice.
Disadvantages of IRS Form S Corp Election
- Shareholders must report dividends as part of their income on individual tax returns.
Frequently Asked Questions About IRS Form S Corp Election
What are the qualifications for becoming an S Corporation?
There are eight qualifications for becoming an S Corporation, which you can find at online. The four key qualifications include:
- The corporation must be domestic and not have foreign investors.
- The corporation has 100 or fewer shareholders.
- The corporation has one stock class.
- The corporation's year ends on December 31.
What is the cost for filing to become an S Corporation?
While there are no costs associated with filing the required Subchapter S election to become an S Corporation, it is highly recommended that you hire an attorney to manage the process for you due to its complex nature.
Can you form an S Corporation at the beginning of your corporation?
The IRS assumes that all corporations are C Corporations unless they take the appropriate measures to become an S Corporation. If you do not take the right action to elect to become an S Corporation, the IRS will continue to treat your corporation as a C Corporation even if you elect for S Corporation status when you form your corporation.
When do I need to file Form 2553?
The timing of your filing can make a big difference in how the IRS treats your corporation. If you file late, the IRS will consider your corporation a C Corporation for the year since the paperwork was not completed on time. You must file before month 3 - day 15 of your corporation's tax year to be considered as a valid S Corporation by the IRS. Your corporation must also meet all of the criteria and be ready to operate as an S Corp by the filing date for it to be valid.
My corporation did not file on time. Is it possible to file late and still be considered an S Corporation?
The IRS developed procedures to file for S Corporation status late. The key requirement to be eligible is that the only reason the corporation failed was because of filing Form 2553 late.
Steps for IRS Form S Corp Election
1. Before sending out your form, make sure that your company meets the eligibility criteria.
2. To be considered an S corporation, you must first fill out IRS Form 2553 called “Election By a Small Business Corporation.” Make sure to include:
- Name and mailing address.
- Your Employer ID Number (EIN).
- Date of incorporation.
- State where the company is incorporated.
- Effective tax year.
3. If you have more than 100 shareholders but plan to classify family members as a single shareholder to meet the fewer than 100 shareholder requirement, make sure to check the appropriate box to let the IRS know.
4. Check over the name, address, and contact information of your corporation's attorney or corporate officer for the IRS to use in case they need to ask for additional information.
5. If you file this form late, you can use the form to let the IRS know that you had a reasonable cause for the late filing.
6. Make a list of all shareholders with voting rights and what percentage of the company they own. They will need to sign and date the form.
7. If your election is accepted, the IRS will send a confirmation letter in the mail.
8. Some states require S corporations to file a form with the state. Make sure to file any applicable forms for your corporation at the state level.
If you need help with the IRS form for S Corp election, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.