S Corp IRS Form: Everything You Need to Know
S corp IRS Form 2553 is one of the required documents a business must complete when electing an S corporation.3 min read
S corp IRS Form 2553 is one of the required documents a business must complete when electing an S corporation. A regular corporation needs to submit a form to Internal Revenue Service (IRS) to get an S corporation tax status. The IRS is U.S. tax collection agency tasked to monitor and administer the Internal Revenue Code by the Congress.
S Corporation Overview
The term S corporation was coined because of Subchapter S of the IRS code. This section sets forth the idea that a corporation may elect a "small business" that can avail the benefits of a limited liability of a corporation, with tax rates computed on the individual shareholder's level.
With this status, profits and losses are reported on the shareholders' tax returns. This explains why S corporations are also called "pass-through" entities because the income of the corporation is distributed to the shareholders who file their individual taxes.
Besides from the aforementioned form, S corporations are also required to file informational income tax return and other IRS forms related to taxes, such as withholding tax from wages of their employees.
Form 2553: Opening the door to S-corporation Status
Forming a business is very exciting though it comes with tough decisions to make. Filing Form 2553 is not a popular choice for many entrepreneurs, but this form can provide significant tax breaks for business owners. Taxes are inevitable and business owners starting a corporation always get taxed, sometimes even twice. The income, without deductions for the distributed dividends given to shareholders, of regular corporations is subjected to a 35 percent corporate tax at the entity level. In addition, shareholders who receive dividends from the corporation's profits pay the second level of tax depending on their bracket. This means that regular corporations experience double taxation.
One good thing about having an S corporation tax status is that the corporation can get the same liability protection of a regular corporation and at the same time avoid double taxation. This point is where IRS Form 2553 comes in, to formally declare a business as an S corporation. Processing usually takes about 60 days from the filing of the form with the IRS.
Eligibility for Filing Form 2553
For a corporation to qualify for an S corporation status, they need to submit a Form 2553 to IRS and should meet the following requirements:
- The corporation is a domestic corporation one.
- The number of shareholders should be below 100.
- Shareholders need to be citizens of the U.S.
- The corporation only issues one stock class.
- Shareholders can be individuals, certain entities (tax-exempt), or trusts.
Form 2553 for state-tax purposes. Also, the corporation needs to file appropriate forms with the state's revenue agency to follow state laws and for them to get the benefits of an S corporation.
What and When to Submit Form 2553 to the IRS
Form 2553, to elect an S corporation, is submitted and filed with the Internal Revenue Services. It should be processed within 75 days of the formation of the corporation, within the new tax year's first 75 days, or any point of the year preceding the year of the election.
Other IRS S Corp Tax Forms
In addition to Form 2553, there are few other IRS forms that business owners should be aware of. One is the IRS corporation extension form. The IRS corporation extension form, also known as Form 7004, provides an extended period of time for the business to file its income taxes, additional returns, and information. Another is Form 1120s, or the S corporation's income tax return form.
Why is Form 2553 Not as Important as it Used to Be?
In the past, the corporation was the only business type that provided asset protection to business owners, while the S corporation was the only tax-friendly way for business owners to protect themselves financially. But the popularity of limited liability companies (LLCs) made S corporation less popular given the fact that limited liability companies can also pass-through the business profits to their shareholders. In the same manner, LLCs have fewer limitations than S corporation regulations have. Both business types also provide similar liability protection in most states.
If you need help with completing an S corporation IRS Form, 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.