What Is IRS Form 2553 and How Do You File It?
Understand the process for changing your business's tax classification. This guide explains how to properly prepare and file IRS Form 2553 for an S corp election.
IRS Form 2553, “Election by a Small Business Corporation,” is the document an eligible entity files to be taxed under Subchapter S of the Internal Revenue Code. This election changes how the business is taxed at the federal level, shifting from a corporate tax structure to a pass-through system. Filing this form alters how profits and losses are reported and taxed for the shareholders.
S Corporation Eligibility Requirements
Before a business can file for S corporation status, it must satisfy a specific set of requirements mandated by the IRS. The entity must be a domestic corporation, meaning it is created or organized in the United States. This ensures the business operates under U.S. law and is subject to its tax regulations.
An S corporation can have no more than 100 shareholders. For this count, members of a family can be treated as a single shareholder. Allowable shareholders are limited to individuals, certain trusts, and estates. Partnerships, corporations, and non-resident alien shareholders are prohibited from owning stock in an S corporation.
A qualifying business can only have one class of stock. This means that all issued shares must have identical rights to distribution and liquidation proceeds. While differences in voting rights are permissible, the economic rights to the company’s profits and assets must be the same for all shareholders.
Information and Decisions for Form 2553
Completing Form 2553 requires gathering specific information and making a decision about the company’s accounting period. The form requires basic entity details, including the corporation’s legal name, Employer Identification Number (EIN), mailing address, the date of incorporation, and the state where it was formed. If the business does not yet have an EIN, it must apply for one; the form can be filed with “Applied for” written in the EIN field.
A decision required on the form is the selection of a tax year. The default option for most businesses is a calendar year ending on December 31. A business may elect a 52-53-week year or another fiscal year if it can establish a legitimate business purpose. Justifying a non-calendar fiscal year requires attaching a statement to the form explaining the business necessity.
Every shareholder must agree to the S corporation election and sign the form. The form requires a detailed listing for each shareholder, including their name, address, signature, the number or percentage of shares they own, and their Social Security Number or EIN. The date each shareholder acquired their stock must also be included.
Filing Deadlines and Late Election Relief
To be effective for the current tax year, the form must be filed no more than two months and 15 days after the beginning of that tax year. For a new business using a calendar year that starts on January 1, the deadline is March 15. Alternatively, a business can file the form at any point during the preceding tax year for the election to take effect in the following year.
Missing the standard deadline does not automatically prevent a business from obtaining S corporation status for the desired year. The IRS provides a process for late election relief, which can be requested if the entity can show it had “reasonable cause” for failing to file on time.
To qualify for late relief, the corporation must represent that it failed to qualify as an S corporation solely because it did not file Form 2553 on time. The entity must have had reasonable cause for its failure to file and must have acted diligently to correct the mistake upon its discovery. The request for late relief is made on the form and may require an attached statement if the explanation is lengthy.
How to Submit Form 2553
The completed Form 2553 cannot be filed electronically; it must be sent via mail or fax. The correct mailing address or fax number depends on the state where the corporation’s principal business is located. The official instructions for Form 2553 contain a list of the appropriate IRS service centers for submission.
After filing, the IRS processes the election and sends an acceptance notice within 60 to 90 days of receiving the form. If the business does not receive any correspondence within this timeframe, it is advisable to follow up with the service center where the form was filed to confirm its status.