Key Takeaways

  • An S corp application is filed using IRS Form 2553 to elect S corporation status for tax purposes.
  • Businesses must meet specific eligibility criteria, including shareholder limits, domestic incorporation, and permitted shareholder types.
  • The form should be filed within 2 months and 15 days after the start of the tax year for which S corp status is desired.
  • Filing late may be allowed if there’s reasonable cause, but it requires additional IRS explanation.
  • Advantages of S corp status include pass-through taxation, potential self-employment tax savings, and retained liability protections.
  • Certain states require additional S corp elections after IRS approval.
  • Obtaining an Employer Identification Number (EIN) is necessary before applying for S corp status.

An S corp application is an IRS form used to request S corp status. It is filed after a corporation is formed and allows a corporation to function as a small business, retaining limited liability but avoiding the double taxation that C corporations are subject to.

An S corporation is a business that has filed articles of incorporation in its state. This status allows the company to pass all income, deductions, losses, etc., to shareholders rather than paying tax itself at the corporate level. Its shareholders report the income on their personal tax forms instead.

How to File for S Corporation Status

The S corp application is IRS Form 2553. It is titled “Election by a Small Business Corporation” and gives detailed information about your business to the IRS, including its eligibility. The steps are as follows:

  • Make sure your business is eligible to elect S corporation status. All shareholders must approve the decision.
  • Get all your shareholders to sign the form.
  • Submit the form. The address depends upon your business' principal location.
  • You will be notified by the IRS service center whether it has accepted your application.
  • Your status as an S corporation will be valid until you choose to terminate it or the IRS revokes it.

If you are filing for S corporation status in New York, New Jersey, or Arkansas, you are required to file an application for election with the state after your status is approved by the IRS.

Common Mistakes to Avoid in an S Corp Application

When completing your S corp application, accuracy and timing are critical. Common mistakes that can lead to delays or IRS rejection include:

  • Missing the filing deadline — not submitting Form 2553 within the 2-month-and-15-day window for the intended tax year.
  • Incomplete shareholder signatures — all shareholders must consent to the election in writing on the form.
  • Incorrect shareholder information — errors in names, Social Security numbers, or ownership percentages can cause issues.
  • Ineligible shareholders — including foreign investors or entities that are not permitted to own S corp shares.
  • Wrong tax year election — if choosing a tax year other than the calendar year, you must meet IRS qualifications and attach additional statements.

Double-check all information before submission and consider working with a tax professional to avoid costly errors.

What Are the Qualifications?

There are several requirements the IRS has for eligibility as an S corporation:

  • The corporation must be domestic with no investors from foreign countries.
  • The corporation must have 100 or fewer shareholders.
  • The fiscal year of the corporation must end on December 31.
  • The corporation must not be a business type that is ineligible, which includes banks and insurance companies.
  • The corporation must be owned by individuals, some trusts, and estates.
  • Shareholders must be United States citizens or legal residents.

Additional State-Level Requirements for S Corps

While the IRS governs the federal S corp election, some states impose their own requirements:

  • Separate state election — States like New York, New Jersey, and Arkansas require an additional S corp election filing after IRS approval.
  • Annual state reports — Many states require annual filings to maintain good standing, which may differ from federal requirements.
  • State-level taxes — Certain states, such as California, impose annual franchise taxes or fees on S corps, regardless of federal pass-through taxation.

Failure to meet these state-specific rules can result in losing your S corp status at the state level, even if your federal election remains valid.

When Should You File the Form?

IRS rules require that your S corporation election form be submitted within two months and 15 days after the tax year begins. If you are starting a new business, this must be done during its first year. If it is not filed on time, you will not have status as an S corporation for that tax year. However, if you can explain a legitimate reason for not filing on time, you can request that the IRS accepts your late election.

Filing Late: Reasonable Cause and Relief Options

If you miss the S corp application deadline, the IRS may still grant late election relief if you can show “reasonable cause.” Common reasons that may be accepted include:

  • Miscommunication between shareholders and tax preparers.
  • Incorrect advice from a tax professional regarding filing deadlines.
  • Administrative errors, such as misplacing the form or sending it to the wrong IRS address.

To request relief, attach a detailed explanation to your Form 2553 or file IRS Form 1120-S with the appropriate statements. The IRS will review your request and determine if late election is justified.

Why Should You Choose Status as an S Corporation?

There are several reasons why an S corporation status is attractive for many businesses. For one thing, it offers liability protection just like a C corporation. It is considered a separate entity, with owners being protected from debts and lawsuits involving the corporation. There are, however, situations in which this protection is not valid, such as when an owner personally guarantees a loan or commits fraud.

Taxes are another reason to elect S corporation status. Owners can reduce the amount of self-employment taxes they pay. Owners of S corporations may be considered employees, so part of their profit distribution may be considered wages and, therefore, not subject to self-employment tax. Instead, the S corporation withholds the tax as a regular income deduction.

C corporations are subject to double taxation, and S corporation status can eliminate that. Corporations pay corporate income tax, and the owners are also taxed on their dividends or profit distributions. This is considered double taxation. Since an S corporation does not pay tax on its own behalf, the profits are only taxed once, as it passes through to the shareholders' personal tax returns.

Losses from S corporations can reduce the amount of taxes owners must pay. Since losses are passed through to the owners just like profits, it reduces the total taxable amount for the shareholders.

Owners of S corporations pay taxes at personal income tax rates, which are lower than corporate tax rates. Therefore, it lowers the amount of taxes paid by the owners.

Potential Tax Savings With an S Corp Election

One of the main reasons businesses file an S corp application is to reduce self-employment tax liability. In an S corp:

  • Owners can split income into reasonable salaries (subject to payroll taxes) and distributions (not subject to self-employment tax).
  • This structure can significantly reduce tax liability compared to sole proprietorships or partnerships, as long as salaries meet IRS standards for reasonableness.
  • The pass-through taxation structure helps avoid the double taxation faced by C corporations, where both corporate profits and shareholder dividends are taxed.

However, improper salary levels or poor recordkeeping can trigger IRS scrutiny, so maintaining compliance is essential.

Obtaining a Federal Tax ID

One important step for S corporations is getting an Employer Identification Number, also referred to as a Federal Tax ID number. This is a nine-digit number issued by the IRS. It is necessary even though the company does not pay its own taxes.

Steps to Take After Your S Corp Application Is Approved

Once the IRS approves your S corp election, you should:

  1. Update business records — Notify your accountant, update payroll systems, and adjust financial statements to reflect the new tax classification.
  2. Set up payroll — If owners are taking salaries, ensure payroll taxes are withheld and remitted properly.
  3. Maintain corporate formalities — Keep meeting minutes, update bylaws, and ensure compliance with both federal and state requirements.
  4. File annual returns — Submit IRS Form 1120-S and provide Schedule K-1 to each shareholder.

Following these steps helps preserve your S corp status and prevents administrative issues.

Frequently Asked Questions

1. What IRS form is used for an S corp application?

IRS Form 2553, “Election by a Small Business Corporation,” is used to apply for S corp status.

2. How soon after forming a corporation should I file the S corp application?

File within 2 months and 15 days after the start of the tax year you want the S corp status to take effect.

3. Can an LLC file an S corp application?

Yes, if it meets IRS eligibility requirements and elects to be taxed as a corporation before filing Form 2553.

4. Do all states recognize S corporations?

Most states do, but some require a separate state-level S corp election.

5. What happens if my S corp application is late?

You can request late election relief if you provide reasonable cause for missing the deadline.

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