Form 2553 is an important document that needs to be filed with the IRS to declare your business status as an S corporation (as opposed to a C corporation). The instructions for Form 2553 can be confusing, so it's important to know who should file Form 2553 and when you need to file it. In this guide, we will go over the basics of Form 2553 so that you understand how to stay compliant.
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What is an S Corp?
Before we get too far into the paperwork, let's define what an S corp is. In short, an S corporation is a regular corporation that has filed Form 2553 with the IRS to be taxed as a small business corporation. This is a popular choice for small and medium-sized businesses because it offers the liability protection of a corporation while allowing the owners to avoid double taxation by electing to be taxed as a partnership or sole proprietorship.
This means that the business itself does not pay taxes on its income; instead, the income is passed through to the individual owners, who are then responsible for paying taxes on their share of the profits. To qualify as an S corp, a business must meet certain requirements, including being a domestic corporation with no more than 100 shareholders and only certain types of shareholders.
Who Should File Form 2553?
Anyone whose business qualifies as an S corp and wants to take advantage of the tax benefits offered by this entity type can fill out form 2553. To qualify as an S corp, a corporation must meet certain IRS requirements, including:
Be a domestic corporation of the United States
Have only allowable shareholders, which include individuals, certain trusts, and estates; and may not include partnerships, corporations, or non-resident alien shareholders
Have no more than 100 shareholders
Have only one class of stock
When Do You Need to File Form 2553?
If your business meets these four requirements, you may file Form 2553 any time during the year. However, if you want your S corporation status to be effective for the current tax year, you must file Form 2553 no later than the 15th day of the 3rd month of the tax year (March 15th for calendar year taxpayers).
For example, if you want your S corporation status to be effective January 1st, 2020, you would need to file Form 2553 no later than March 15th, 2020.
How to Fill Out Form 2553
Form 2553 can be found on the IRS website. At first, it may look a bit intimidating. The truth is, it's pretty straightforward. Still, there are a few key points to keep in mind when filling it out. Here are the major sections of the form that you need to be aware of.
Part I – Business and Shareholder Information
In this section, you'll need to provide your business name, address, and EIN (Employer Identification Number). If you can't find your EIN, you can request it via a 147c Letter.
You'll also need to indicate the date that your business began operating as an S corporation, also known as the effective date of the election.
Finally, you'll have to provide information about each shareholder, such as name, address, social security number, and the number of shares owned. Each shareholder is required to sign a consent statement before you file.
Part II – Fiscal Tax Year Information
Many businesses aren't required to fill this section out. That's because it only applies to organizations whose fiscal year doesn't end on December 31. Alternate fiscal calendars are used by a smaller number of organizations, like seasonal businesses or companies whose shareholders have selected a different fiscal year.
Part III – Qualified Subchapter S Trust (QSST) Information
If you thought the fiscal tax year section of Form 2553 was exciting, wait until you read about the Qualified Subchapter S Trust section!
In reality, this section doesn't apply to most businesses. A QSST is an election made on behalf of a trust that retains ownership as the shareholder of an S corporation. In short, it's a trust with just one beneficiary. If this situation applies to your S corp, you'll be required to provide some basic information about the beneficiary.
Part IV – Late Corporate Classification Election Representations
Again, this section is relevant to a smaller percentage of businesses. You only need to fill this section out if you're filing late, after the March 15 deadline. If this applies to you, you have an opportunity to explain your late filing. Otherwise, you can skip this section.
Filling out form 2553 may seem like a daunting task, but it's actually pretty simple once you know what you're doing. Just be sure to double-check that all the information is correct before you submit it—incorrect or missing information could cause delays in processing your request for S corporation status.
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