S Corp Election Form: Everything You Need to Know
The S-corporation election form is the Internal Revenue Service Form 2553. It is the tool a business can use to qualify as an S-Corporation for tax purposes. 8 min read
2. Elect S-Corporation status
3. What is an S Corporation?
4. What is Form 2553?
5. When do I submit Form 2553 to the IRS?
6. Are there other IRS S Corp Tax Forms I should be aware of?
7. Benefits of Electing S Corp Status
8. Procedures for Late Elections for S-Corporation Status
9. Can an LLC be taxed as an S Corporation?
10. File IRS Form 8832
11. Reasonable Cause
S-corp Election Form
The S-corporation election form is the Internal Revenue Service Form 2553. It is the tool a business can use to qualify as an S-Corporation for tax purposes.
Elect S-Corporation status
The right tax classification allows a business to have the most advantageous taxation schedule from the federal government via the Internal Revenue Service. It’s imperative to have the appropriate tax classification. Due to its many advantages, many LLCs and C-corporations file the required documents for S-corporation status.
The benefit of an S-corporation is that it allows the company to give the tax obligation to its shareholders. In a C-corporation the company is first taxed on its income and then shareholders are taxed again when dividends are paid. Also, C-corporations are required to file taxes quarterly and S-corporations are only required to file taxes annually. Form 2553 is the Internal Revenue Service’s tool for small businesses to elect an s-corporation status.
Form 2553 must be filed in a timely manner. Download Form 2553 here from the IRS website. Timely, in this case, means the form must be filed on or before 75 days of the LLC or c-corporation’s first year, or after the start of the new year (again 75 days). Companies could potentially enjoy hundreds in tax savings that an S-corporation status can deliver.
The Internal Revenue Service does not charge a fee for the filing of Form 2553. It is recommended that, due to the complicated nature of Form 2553, a company should hire an attorney to fill out the paperwork associated with a Form 2553 filing. Form 2553 is titled, “Election by a Small Business Corporation”. Once the form is filed the Internal Revenue Service will send a letter back (to the mailing address listed on the form) confirming the election for this tax treatment.
In order to successfully be qualified as an S-corporation, the company must be incorporated (even before filing the Form 2553). Incorporation processes and documents are different from state to state. Usually there are requirements that include the writing of Articles of Incorporation, by-laws, and schedules for annual meetings.
There are assorted other legal documents required to operate and form a business. The state in which the company will conduct the majority of its business is the state in which the business should be incorporated. Eligibility for an S-corporation election should be researched and verified and then a business can file Form 2553 with the IRS. It should be noted that the form requires each and every shareholder to sign it.
What is an S Corporation?
An S-corporation is essentially a tax election made by a small business. This status allows businesses to pay taxation through to their shareholders. This is an advantage over the C-corporation which gets taxed once at the corporate level and then again when the shareholders are paid dividends. This means that each individual shareholder reports to the Internal Revenue Service their share of the profits and losses of the company on their tax returns. In order for the business to be eligible some criteria must be met:
- The company’s shareholders must all be citizens of the U.S.
- The company must be a U.S. corporation
- The company’s stock must be of only one class
- The company’s shareholders must be entities, trusts, or individuals
- The company cannot have shareholders above 100 (with family members counted often as an individual shareholder)
In order for the company to be confirmed as an S-corporation, Form 2553 must be completed and submitted to the Internal Revenue Service.
What is Form 2553?
Form 2553 is the Internal Revenue Service’s tool to elect to become an S-corporation. The title of this form is “Election by a Small Business Corporation”. It is the vehicle through which corporations can reduce the amount of taxes that they have to pay. 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). Download Form 2553 here from the IRS website.
When do I submit Form 2553 to the IRS?
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.
Are there other IRS S Corp Tax Forms I should be aware of?
In addition to Internal Revenue Service Form 2553 (which serves to elect S-corporation tax status) an organization should also be aware of S-corporation specific documents. Form 7004 (also known as the S-corporation extension form) allows a business more time to file things like additional returns, information or business income taxes. Another important form is Form 1120 which is the form that must be filled out to file taxes for an S-corporation.
Benefits of Electing S Corp 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.
Corporations (whether classified as C-corporations or S-corporations) have the same liability protection. All corporations have the protection of separate entities, and therefore shareholders enjoy the security against liabilities for corporate lawsuits and debts. Once caveat, the security from liability isn’t absolute. If an owner or shareholder personally signs a guarantee on any loans.
In addition, taxes to the individual can be reduced by becoming an S-corporation. Companies that are, in reality, sole proprietorships and even some partners in some kinds of partnerships pay self-employment taxes on the total profits of the enterprise. An S-corporation allows the profits to be reduced by payroll (paid to shareholders as employees) and so taxes are lower. Even though an S-corporation still has to pay 50% of FICA taxes (Medicare/Social Security tax), the company still pays fewer taxes overall.
The main benefit of an S-corporation over a C-corporation is that on corporate profits there is no double tax. 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-taxation”.
The S-corporation’s income is taxed once and only once at the shareholder level. In addition, when an S-corporation has a loss, the individual shareholders are able to claim that loss on their tax return. This can reduce some or all of an owner’s other income. The corporate tax rate is 35%, S-corporation shareholders are taxed (instead of at the corporate rate) at their lower personal tax rate. This is why the S-corporation is such a great thing for small business because their income is only taxed once and at a lower rate.
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 it is 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 “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 the Form 2553.
Can an LLC be taxed as an S Corporation?
In short, yes. Any corporation that meets the criteria listed above can elect to be taxed as an S-corporation. This is particularly helpful if distributions are being regularly made to owners (members) who are not employees of the LLC.
File IRS Form 8832
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. 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. J There are three criteria that must be met in order 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”.
To clarify what is “reasonable” the Internal Revenue Service states that they will carefully consider the corporations reasons for a late filing of the 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 by weighed solely on its merits in order 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.
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