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How to Fill Out IRS Form 2553: S Corporation Election
At a Glance
- Corporations use Form 2553 to elect S corporation status, allowing business income to pass directly to shareholders.
- To qualify, corporations must meet several criteria, such as being a domestic entity in the US with 100 or fewer shareholders.
- Form 2553 must be filed within two months and 15 days after the beginning start date for the S corp status.
- Successfully electing S corporation can provide significant tax benefits, avoiding the double taxation often experienced by C corporations.
Corporations and other eligible entities use Form 2553 to elect classification as an S corporation for federal tax purposes. Getting S corp status provides an alternative method for taxation where business income, losses, and other tax items pass through directly to the shareholders rather than being taxed at the corporate level.
Here is a guide on completing Form 2553 to elect your business as an S corporation successfully.
Determining Eligibility to File Form 2553
To qualify for S corporation status, Form 2553 filers must meet specific eligibility rules, including:
- Organized as a domestic entity in the United States
- Has 100 or fewer shareholders
- Has only eligible shareholders (individuals, estates, certain trusts)
- Does not have nonresident alien shareholders
- Has only one class of stock
Review all shareholder consent rules and restrictions as well to confirm eligibility.
When to File Form 2553 with the IRS
The form must be filed within the following:
- Two months and 15 days after the beginning start date entered for the S corporation status.
- Any point during the tax year immediately before the desired effective status date.
For most small businesses with a calendar fiscal year starting January 1, filing by March 15 ensures IRS approval for the current tax season.
Completing All Sections of Form 2553
Part I: Business Information
Enter the corporation’s legal name, address, EIN, and date, determining when S corporation status takes effect. Indicate if it is the first year of incorporation.
Part II: Selection of Tax Year
Choose an allowable tax year-end date based on business operations. Fiscal year selections require additional IRS approval.
Part III: Qualified Subchapter S Trust (QSST) Elections
Only applies to trusts transferring corporate stock to an electing small business trust (ESBT) or qualified subchapter S trust (QSST).
Parts IV-V: Corporate Officer & Shareholder Signatures
Authorized officers and all shareholders, based on the effective date entered, must provide signatures to validate consent.
Shareholder Information Matrix
For each current or former shareholder, enter details like name, address, stock owned percentage and acquisition date, tax ID, and year-end date.
Successfully electing to be taxed as an S corporation can provide significant tax benefits, allowing income to pass through directly to shareholders, avoiding the double taxation often experienced by C corporations. The process requires careful attention to eligibility criteria, timely filing, and accurate completion of Form 2553. By following the steps outlined, business owners can navigate the election process more effectively, ensuring compliance and making the most of their corporate structure. Ensuring all shareholders are in agreement and properly documented is essential for a smooth transition to S corp status.
Frequently Asked Questions (FAQ)
What is an S Corporation?
An S corporation is a type of corporation that elects to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes.
How do I qualify for an S corporation status?
To qualify for S corporation status, the entity must be a domestic corporation, have only allowable shareholders, including individuals, certain trusts, and estates, have no more than 100 shareholders, have only one class of stock, and not have any nonresident alien shareholders.
What are the benefits of becoming an S corporation?
The main advantage of becoming an S corporation is that it provides tax benefits. S corporations avoid double taxation because the corporation’s income, losses, deductions, and credits are passed through to their shareholders.
What is Form 2553?
Form 2553 is used by corporations and other entities to elect to be classified as an S corporation for federal tax purposes.
When should I file Form 2553?
You should file Form 2553 no more than two months and 15 days after the beginning of the tax year the election is to take effect, or at any time during the tax year preceding the tax year it is to take effect.
Can a nonresident alien be a shareholder in an S Corporation?
No, one of the requirements for S Corporation status is that it does not have nonresident alien shareholders.
What is a Qualified Subchapter S Trust (QSST)?
A QSST is a trust that meets certain requirements to be eligible to hold S corporation stock.
Can an S corporation have more than one class of stock?
No, one of the requirements for S corporation status is that it has only one class of stock.
What happens if I fail to file Form 2553 on time?
If you fail to file Form 2553 on time, you may still be able to get relief for a late election. You should consult with a tax professional for more information.
What information do I need to provide on Form 2553?
You need to provide the corporation’s legal name, address, EIN, the date you want the S corporation status to take effect, and other business information. You also need to provide information about the shareholders and their consent to the election.