Step-by-Step Guide to Completing IRS Form 2553 with Clear 2553 IRS Instructions

When a business owner wants to attain S Corporation status, they seek IRS Form 2553. Only eligible small enterprises can seek this transition, which is mainly done for federal tax purposes to avoid double taxation.

Filing IRS Form 2553 has significant tax implications, as federal tax obligations will be transferred to an organization's shareholders. This article will look into the step-by-step guide to completing the IRS Form 2553 with clear 2553 IRS instructions to follow while navigating this process.

However, before looking into the comprehensive guide, we will need to understand certain aspects, such as what an IRS Form 2553 is, what an S Corporation is, who should file the IRS Form 2553, and when this should be done. With no further ado!

What is an S Corporation?

An S Corporation has a special tax status under the Internal Revenue Code. This status permits any business profits and losses to be directly passed to its shareholders.

The purpose is to avoid double taxation at the corporate level, whereby the business does not bear the profits or losses. This means that it does not pay any corporate income tax; rather, this burden is shifted to the individual level, where the shareholders take on this tax obligation through their individual tax returns.

What is an IRS Form 2553?

IRS Form 2553 is a document used by small businesses that want to gain corporate status for federal tax purposes. The aim of getting corporate status is to avoid tax obligations where the business gains certain tax benefits.

Business corporations avoid taxes through the pass-through taxation entity, and this obligation is shifted to the shareholders. Though it might appear that the shareholders are bearing a heavy burden, the contrary is true.

Without the S Corporation status, the business partners/owners will experience double taxation. They will pay corporate income tax and additional taxes on the dividends received through their personal tax returns.

It has characteristics similar to those of a limited liability company (LLC), where business profits and losses are subject to the same pass-through taxation privilege as members' personal tax returns. Thus, the enterprise enjoys liability protection,

Who should File IRS Form 2553?

Certain eligibility requirements are expected to be met before filing Form 2553. These are:

• The business must be a domestic corporation participating in corporate tax returns.
• For it to be classified as an S Corporation, it must have more than 100 allowable shareholders who are U.S. citizens or resident aliens. The IRS does not recognize non-resident alien shareholders since they are operating illegally and their business nature does not meet legal requirements.
• The shareholders must be individuals, estates, or certain types of trust. Additionally, the shareholders must sign consent forms for the agreement to be valid.
• The shareholders can only have one class of stock. One class of stock is whereby a business has one type of stock, with the shareholders having identical rights in dividends, voting rights in corporation elections, and equal liquidation proceeds.
• Banks and insurance companies are not S corporations. The IRS excludes these financial institutions because of the complex nature of their operations and regulatory requirements.

When to File Form 2553?

There are two instances when Form 2553 can be filed.

• At any time during the tax year preceding the tax year for which the election is to take effect.
• On or before the 15th day of the 3rd month of the tax year for which the election is to take effect.

Step-by-Step Guide to Completing to Completing Form 2553

Step 1: Ensuring that the Business Pases the Eligibility Criteria

The IRS sets eligibility requirements that should be attained for a business to elect S Corporation status. These requirements are:

• The business owners or shareholders must be U.S. citizens or residents.
• The business enterprise must be a domestic corporation or a limited liability company.
• The listed shareholders must be more than 100.
• It needs only to have one class of stock.
• The entity needs to be eligible; thus, financial institutions such as banks and insurance companies do not qualify.

If an entity meets these criteria, the organization can go ahead and file Form 2553.

Step 2: Downloading Form 2553

Visit the IRS website (www.irs.gov) to download Form 2553. The Form is in PDF format and can be filled out electronically or scanned and printed to fill out manually, especially if you need to confirm the corporation details.

Step 3: Gathering and Filling the Needed Information.

To commence the process, the company management needs to collect all related information about the company and fill out Form 2553. These are:

• State of incorporation: Information about the state where the business enterprise was incorporated should be provided.
• The enterprise needs to fill out the date when the corporation was legally formed.
• The name and address of the corporation, including the exact name as it appears on its charter and legal documents, and the exact address with the room number, if applicable, should also be provided.
• Corporation Employer Identification Number (EIN): Present the corporation EIN, and if an enterprise does not have one, they should apply by filling out Form SS-4, Application for Employer Identification Number.
• Shareholder information: This includes the names, addresses, and social security numbers of each shareholder.
• Corporate structure: Whether the corporation is a C Corporation or an LLC should be listed. The corporation's status is normally that of a small business enterprise, but if it is not, then its business structure should be properly indicated for the Form to be approved by the IRS.

Step 4: Indicate the Effective Date of the S Corporation Election

The enterprise needs to indicate when they want the S Corporation to take effect normally; the appropriate date would be the beginning of the tax year or the fiscal year.

If the organization wants the election to take place in the current year, the Form should be completed within two months and fifteen days of the beginning of the year.

However, if the enterprise wants the election to take effect in the next year, the Form should be filled out on the 15th day of the third month of a new tax year.

It should be noted that:

• Suppose the business enterprise chooses to use a fiscal year as its election date. In that case, the business reason for using this particular time will need to be indicated instead of the original deadline for the calendar year.
• If you are filing Form 2553 at a later date than the one required, you need to fill in a late election relief or late election request under the IRS provision for late filing. Reasons for the late filing and relevant details need to be presented.

Step 5: List the Shareholders and their Consent

In addition to providing the number of shareholders and their addresses, the business must submit their taxpayer identification numbers (TINs), where details of their tax classification and tax filing can be confirmed.

Additionally, the listed shareholders must have their consent statement validating their agreement to elect a S Corporation. This should be signed against each shareholder's name. Obtaining the shareholders is an indication of approval after understanding the tax implications of being elected as an S Corporation.

Furthermore, the precise percentage of ownership of each shareholder and their personal return should be presented at this stage. It should be noted that failure to sign the consent section in the Form will lead to a late election or rejection of the S Corporation by the IRS.

Step 6: Exceptions to Consider

QualificationSubchapter S Trust (QSST) Election Under Section 1361(d)(2)

This part is completed if a shareholder holds shares under trust and meets the set corporation requirements by the IRS.

Electing Small Business Trust (ESBT) Election Under Section 1361(c)(2)(A)(v)

This part is completed if a shareholder is an ESBT and meets the set requirements by the IRS.

Step 7: Answer Questions About Corporation Activities

It might appear repetitive, but it is necessary to fill out all parts of the IRS Form 2553. In this step, questions regarding specific aspects and activities of the corporation will be asked.

For example, one will be asked if the business corporation has previously been an S Corporation and what the citizenship status of the shareholders is, such as whether they are resident aliens or non-resident aliens or if it is a qualified S subsidiary (Qsub).

Those responsible for filling out the Form should answer with truthful information, as the lack of it might invalidate the election process.

Step 8: Double-check the Information

It is important to verify that all the information posted in IRS Form 2553 is accurate and that nothing is missing. The corporation should also ensure that all the shareholders' details are correct and match the details in the company's legal documents.

The signatures should be verified, and the business owner's EIN should be accurate. Additionally, the filing date should meet the IRS requirements; otherwise, the process to elect an S Corporation will be considered invalid. The timely filing of the Form should also be ensured.

Step 9: Sign and Date of Form 2553

An officer of the business entity could be the corporation owner, the president, the vice president, the CEO, or any other authorized current shareholder.

Step 10. Submitting the Form to the IRS

After filling out and reviewing Form 2553 to ensure accuracy and that the corporation eligibility requirements are met, the next step in the filing process is to ensure that it is submitted to the IRS.

It is recommended that the Form be mailed to the correct address offered in the IRS instructions with confirmation that the service address center is also indicated on the mailing address.

Corporations should be careful when mailing as the addresses differ depending on the business entity's location. Thus, the correct address should be confirmed before sending the form.

Alternatively, the Form can be faxed electronically to the IRS. For corporations submitting late elections, additional forms need to be submitted.

Note: If the business wanting to elect an S Corporation is outside the U.S., the Form will need to be submitted to the designated IRS office for international filing.

Step 11: Confirm the Acceptance of the Election

Upon submitting Form 2553, the IRS will send a notification of acceptance or confirmation letter approving the election for the business entity. The waiting period is normally 60 days. However, if the election is rejected, the IRS will personally contact the organization with the reason for the failure.

It is advisable to review the IRS's reasons for the rejection and make the necessary corrections before filing Form 2553 again.

Step 12: Keep a Record of the Filing

Once the confirmation of the election status has been received, it is a rule of thumb that corporations need to keep a copy of the approved Form 2553 and any corresponding business records.

This is done as a cautionary measure, and the copy can also be used for tax filing and future reference.

This is the final step guide to completing IRS Form 2553

Key Points to Remember

• Be keen to observe time: The filing deadline is usually set within the first 2 months and fifteen days at the start of every tax year. Thus, if you want to elect S Corp status, the deadlines should be taken into consideration.

Nevertheless, if you miss the IRS-set deadline, a corporation can request late election relief from the IRS.

• Please seek Professional Advice: It is highly recommended that the business entity consult the advice of a tax professional or CPA before deciding to elect S Corporation status. This qualified person will examine the eligibility criteria to determine if the business can qualify for the status.
• Check the State Requirements:  Different states offer requirements that might not be similar despite the S Corporation election being under federal taxes. Thus, it is advisable to check if your eligibility criteria confirm with state tax implications.

Mistakes to Avoid

• Missing shareholder's consent: Failure to obtain shareholder consent will invalidate the S Corporation election.
• Missing deadlines: The deadlines should be observed to avoid invalidation. However, if the deadline has expired, the enterprise might apply for late election relief from the IRS.
• Not observing state tax implications: A corporation can face state tax implications if the enterprise fails to observe state tax regulations.
• Providing incorrect information can cause delays in the election process or even its rejection; hence, caution is advised.

Conclusion

Filing Form 2553 is a significant decision that can have long-term tax implications for your business and Shareholders. However, to reap these benefits, an enterprise needs to adhere to the above-mentioned steps. Additionally, the proper understanding of the IRS instructions and seeking professional advice when needed will work to ensure a smooth and successful S corporation election. This guide provides a general overview; nevertheless, it is crucial to consult the official IRS Form 2553 instructions and state tax implications.