IRS Form 2553: Everything You Need To Know

Running a small business comes with its own set of challenges, especially when it comes to navigating the world of taxes and regulations. As a business owner, you’re probably always on the lookout for ways to save money and optimize your operations.

But when it comes to tax elections, a lot of questions might pop up, like:

❓ What exactly is IRS Form 2553?

❓ How can it benefit my business?

And most importantly, is electing S corporation status the right move for you?

Picture this: you're diving into your business's finances, and suddenly, the concept of "double taxation" comes up. Sounds intimidating, right? But trust me, it's a common concern among small business owners like you.

🤔 Should your business stick with C corporation status and deal with double taxation?

🤔 Can switching to an S corporation really save you money on taxes?

🤔 What are the risks and rewards of making this tax election?

If these questions have crossed your mind, you’re not alone. Many small business owners face the same dilemmas.

Let me cut to the chase:

Electing S corporation status using IRS Form 2553 can potentially save your business significant money by avoiding double taxation and reducing self-employment taxes. But there are important considerations and eligibility requirements you need to know.

In this blog, we’ll cover:

🔍 What IRS Form 2553 is and why it matters

💡 How your business can benefit from electing S corporation status

📝 The step-by-step process for filing the form

📋 Key eligibility requirements and potential pitfalls to avoid

So grab a cup of coffee, get comfortable, and let's unravel the mysteries of IRS Form 2553 together.

What is IRS Form 2553?

IRS Form 2553, also known as "Election by a Small Business Corporation," is a form that certain businesses can file with the Internal Revenue Service (IRS). 

When a business decides to register as a corporation, it is automatically classified as a C corporation. 

However, not all businesses want to stay as a C corporation because of the way they are taxed. This is where Form 2553 comes in.

By submitting Form 2553, eligible businesses can choose to be taxed as an S corporation instead of a C corporation. 

But what does that mean, and why would a business want to do this?

The main reason businesses choose to file Form 2553 is because of the tax benefits that come with being an S corporation. Normally, a C corporation is taxed twice. 

• First, the corporation itself pays taxes on its profits. 
• Then, if the corporation gives some of those profits to its shareholders as dividends, the shareholders also have to pay taxes on that money. 

This is called double taxation, and it can be quite costly.

On the other hand, an S corporation avoids this double taxation. 

With S corporation status, the corporation’s profits and losses are not taxed at the corporate level. Instead, they "pass through" directly to the shareholders. 

This means that the shareholders report the profits and losses on their personal tax returns, and they only pay taxes once, at their individual tax rate. 

This pass-through taxation can save business owners a lot of money, making it a very attractive option.

Additionally, S corporation status can also help business owners save on self-employment taxes. 

In a regular C corporation or an LLC, business owners often have to pay a self-employment tax on all of their income. 

But with an S corporation, the income is divided into two parts: a salary and a distribution. The salary is subject to employment taxes, but the distribution is not. 

This division can lead to even more tax savings.

In summary, IRS Form 2553 allows businesses to choose a tax status that can save them money by avoiding double taxation and reducing self-employment taxes. 

For many small businesses, these benefits make filing Form 2553 a smart decision.

What are the Benefits of Electing S Corporation Status?

Choosing to elect S corporation status by filing IRS Form 2553 can offer your business several important tax benefits. 

These benefits can make a big difference in your business’s financial health. 

Let’s take a closer look at the key advantages that make S corporation status such a good option for many small businesses:

Pass-Through Taxation

One of the biggest reasons to choose S corporation status is something called pass-through taxation. 

To understand why this is important, let’s first talk about C corporations. In a C corporation, the business’s income is taxed twice. 

First, the business itself pays taxes on its profits. 

Then, when the business gives out those profits to the owners (called shareholders), the shareholders have to pay taxes on that money again. 

This is known as "double taxation," and it can really add up.

But with an S corporation, things work differently. 

Instead of the business being taxed twice, the income, losses, deductions, and credits are passed directly to the shareholders. 

This means that the business’s income is only taxed once, at the shareholder level, when they file their personal tax returns. 

This single layer of taxation can save a lot of money, allowing the shareholders to keep more of the earnings that the business makes.

Self-Employment Tax Savings

Another great benefit of S corporation status is the potential to save money on self-employment taxes. 

If you’re a member of an LLC or a partner in a partnership, you usually have to pay a self-employment tax on all of your net earnings. 

This tax is 15.3% and goes towards Social Security and Medicare.

However, when an LLC or partnership elects to be taxed as an S corporation, there’s a way to reduce the amount of self-employment tax you have to pay. 

Here’s how it works: As an S corporation owner, your income is split into two parts. 

The first part is a reasonable salary, which is subject to income tax and employment taxes like Social Security and Medicare. 

The second part is called a distribution, and this part is only subject to income tax—not Social Security or Medicare taxes. 

By carefully managing how much of your income is taken as salary and how much as distribution, you can significantly reduce your self-employment tax burden. 

This can be a big advantage for business owners who are looking to save money.

Write-Off of Start-Up Losses

S corporation status can also be very helpful when your business is just getting started. 

Many new businesses experience losses in their early years as they work to grow and establish themselves. 

One of the benefits of being an S corporation is that these start-up losses can be passed through to the shareholders. 

This means that the shareholders can use these losses to reduce the amount of other income they have to pay taxes on in their personal tax returns. 

This can lower the overall tax bill for the shareholders during those early, critical years, providing a financial cushion that can help the business get through its initial stages and move toward profitability.

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What are the Eligibility Requirements for Filing Form 2553?

Before your business can enjoy the benefits of S corporation status, it needs to meet certain rules set by the IRS. 

These rules, or eligibility requirements, make sure that only certain types of businesses can choose to be taxed as an S corporation. 

Let’s go through the key requirements step by step:

Domestic Corporation Requirement

First, to qualify for S corporation status, your business must be a domestic entity. 

This means your business needs to be legally registered and operating within the United States. 

So, whether you have a corporation or an LLC, if your business is based in the U.S., it can apply to be an S corporation. 

However, if your business is a foreign corporation or based outside the U.S., unfortunately, it cannot choose S corporation status under IRS rules.

Shareholder Restrictions

Next, let’s talk about who can own shares in an S corporation. One important rule is that an S corporation cannot have more than 100 shareholders. 

Shareholders are the people or entities that own parts of the business. 

Additionally, all of these shareholders must be U.S. citizens or residents. This means that non-U.S. residents (nonresident aliens) are not allowed to hold shares in an S corporation.

However, there’s a helpful exception: family members can often be counted as a single shareholder. 

So, if you have multiple family members owning shares, they might be counted as one, which can help in meeting this 100-shareholder limit.

Stock Class Limitations

Another important rule is that the business can only have one class of stock. 

But what does that mean? It means that all the shares in the company must be equal when it comes to profits and distributions. 

In other words, every shareholder should have the same rights to earn money from the business. 

This rule is in place to keep things simple and fair for all shareholders.

Now, you might be wondering about voting rights. 

It’s okay for different shares to have different voting rights as long as they don’t affect the financial rights. 

As long as everyone’s share of the profits is treated the same, the IRS is fine with it.

Exclusions

Finally, there are some types of businesses that cannot elect S corporation status, even if they meet all the other requirements. 

These businesses include:

• Banks or thrift institutions that use special accounting methods for bad debts.
• Insurance companies that are taxed under specific sections of the tax code.
• Corporations that have chosen to be treated as possessions corporations under certain IRS rules.
• Domestic international sales corporations (DISCs) and former DISCs.

These exclusions exist because the way these businesses operate or their specific tax obligations do not fit well with the S corporation tax rules.

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How to File IRS Form 2553?

Filing IRS Form 2553 is an important step if your business wants to become an S corporation. 

This process may seem complicated, but by following the right steps and understanding the deadlines, you can make it much easier. 

Here’s a simple guide to help you through the process:

Filing Deadlines

First, let’s talk about when you need to file Form 2553. Timing is very important because if you miss the deadline, your S corporation status might not start when you want it to. 

Here’s what you need to know:

• Standard Deadline: You need to file Form 2553 no later than 2 months and 15 days after the start of the tax year in which you want your S corporation status to begin. 

For most businesses, the tax year starts on January 1, so this means you should file by March 15.

• Early Filing Option: You don’t have to wait until the tax year starts. You can also file Form 2553 anytime during the previous tax year. 

For example, if you want your S corporation status to start in 2024, you can file Form 2553 anytime during 2023.

It’s really important to meet these deadlines because it ensures that your S corporation status will be in place for the tax year you want.

Filing Process

Now that you know the deadlines, let’s go over the steps to actually file Form 2553:

1. Download the Form: The first step is to get the latest version of Form 2553 from the IRS website. This ensures that you have the correct form to fill out.

2. Complete the Form: Next, you need to fill in the form with the required information. This includes your corporation’s name, address, and Employer Identification Number (EIN). 

You’ll also need to list the names and addresses of all shareholders and get their consent to the S corporation election.

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3. Part II (If Needed): If your business uses a fiscal year that isn’t the calendar year (January to December), you’ll need to complete Part II of the form. 

This section requires you to explain why you’re using a different fiscal year.

4. Sign and Date: Make sure the form is signed and dated by an authorized person, usually a corporate officer. 

This step is essential to validate the form.

5. Submit the Form: You cannot submit Form 2553 online. Instead, you’ll need to send it by mail or fax.

• Mailing: Mail the completed form to the IRS service center that handles your state. The addresses are listed in the instructions that come with the form.
• Faxing: If you prefer to fax the form, make sure you keep the fax confirmation as proof that you sent it.

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Late Filing Relief

What happens if you miss the deadline? Don’t worry—there are ways to file late, but certain conditions must be met:

• Intent to Elect: Your business must have intended to elect S corporation status by the deadline.
• Reasonable Cause: There must be a good reason, like an unintentional mistake, for missing the deadline.
• Consistent Reporting: All shareholders must have reported their income on their personal tax returns as if the S corporation election was already in place, even if the form was filed late.

If you meet these conditions, you can still file Form 2553 late. 

You’ll need to write "FILED PURSUANT TO REV. PROC. 2013-30" at the top of the form and include an explanation of why you missed the deadline. 

All shareholders must sign this statement.

By following these steps and understanding the filing requirements, your business can successfully complete the process of electing S corporation status.

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How to Check the Status of Your S Corporation Election? 

After you’ve taken the important step of filing IRS Form 2553 to choose S corporation status for your business, the next thing you’ll probably want to do is make sure that your election has been accepted.

It’s important to know what to expect during this process and how you can check the status of your application. Here’s a simple guide to help you:

IRS Confirmation

Once you’ve submitted Form 2553, the IRS will review your application. They will check if your business meets all the requirements to become an S corporation. 

After they finish reviewing, the IRS will send you a letter, called a "ruling letter," to let you know whether your S corporation election has been approved or rejected. 

This letter is usually sent by mail to the address you provided on Form 2553.

But what if you want to check the status of your application before you receive the ruling letter? 

Don’t worry; you can contact the IRS directly to get an update:

1. Call the IRS Business and Specialty Tax Line: You can call the IRS at 1-800-829-4933. When you call, be sure to have your Employer Identification Number (EIN) ready. 

You should also have any other important information handy, such as the date when you filed Form 2553.

2. Verify Your Status: The IRS representative you speak to can check if your S corporation election has been processed and give you an update on the status of your application. 

This way, you’ll know where your application stands even before you receive the official letter.

Timeline

The time it takes for the IRS to approve your S corporation status can vary, but here’s what you can generally expect:

• Standard Processing Time: In most cases, you should receive the ruling letter from the IRS within about 60 days after they receive your Form 2553. 

This is the typical time it takes for them to process your application.

• Delays: Sometimes, there might be delays. 

For example, if there are any issues with your application, such as missing information or the need for more documents, the processing time could be longer. 

Delays can also happen during busy times of the year, like tax season.

• Additional 90 Days: If you requested a special ruling letter from the IRS by checking box Q1 in Part II of Form 2553, the processing time could take an extra 90 days. 

This longer timeline happens because the IRS needs more time to issue this type of ruling.

If you haven’t heard back from the IRS within the expected timeframe, it’s a good idea to call the IRS Business and Specialty Tax Line again to make sure your application is still being processed as expected. 

This will help you stay informed and know what’s happening with your S corporation election.

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FAQs About IRS Form 2553

When you’re thinking about filing IRS Form 2553, you might have some important questions. 

Here are the answers to three of the most common questions people ask:

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How Long Does It Take to Process Form 2553?

After you submit Form 2553, you might wonder how long it will take to hear back from the IRS. 

Usually, the IRS takes about 60 days to process your application. During this time, they will carefully review your form to make sure that your business meets all the requirements to become an S corporation. 

They will also check that you filled out the form correctly. 

If everything is in order, the IRS will send you a letter to let you know that your S corporation status has been approved. 

However, if you filled out Part II of the form and requested a special ruling from the IRS (by checking box Q1), the process might take a bit longer—up to an additional 90 days.

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Who Needs to Consent to the S Corporation Election?

For your business to successfully elect S corporation status, all shareholders who own stock in the corporation on the day the election is made must agree to the election.

This means that every shareholder needs to sign Form 2553 to show their consent. If your business has many shareholders, it’s very important to gather all the necessary signatures before you submit the form to the IRS. 

This step is crucial because it ensures that everyone who owns a part of the business agrees with the decision to change the business’s tax status.

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Can Form 2553 Be Filed Online?

You might be wondering if you can submit Form 2553 online, but unfortunately, the answer is no. Right now, the IRS only allows Form 2553 to be submitted by mail or by fax. 

When you’re ready to file the form, make sure you send it to the correct IRS service center based on where your business is located. 

The addresses are listed in the instructions that come with the form. 

If you decide to fax the form instead of mailing it, be sure to keep the fax confirmation as proof that you submitted it. 

This way, you have a record that the form was sent to the IRS.

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What are the Common Mistakes you can Avoid When Filing Form 2553? 

Filing IRS Form 2553 is a very important step if you want your business to become an S corporation. 

However, to make sure everything goes smoothly, it's essential to avoid some common mistakes that could lead to delays, rejections, or other problems. 

Let’s look at these mistakes and how you can avoid them:

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Missed Deadlines: Importance of Timely Filing

One of the most critical things to remember when filing Form 2553 is the deadline. The IRS has strict rules about when this form needs to be submitted. 

You must file Form 2553 no later than 2 months and 15 days after the start of the tax year in which you want the S corporation status to take effect. 

If you miss this deadline, your election may be denied for that year, and you’ll have to wait until the next tax year to try again. 

To avoid this, it’s a good idea to mark the deadline on your calendar and submit the form as early as possible. 

Although the IRS has some options for late filing, it’s better not to rely on these and instead file on time.

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Incorrect Information: Ensuring All Details Are Accurate

Another common mistake is providing incorrect or incomplete information on Form 2553. 

Even small errors, such as a wrong Employer Identification Number (EIN), a misspelled name, or missing sections, can cause delays or lead to your application being rejected. 

To avoid this, double-check all the information before submitting the form. 

It can also be helpful to have someone else review the form to catch any mistakes you might have missed. 

Taking the time to ensure everything is accurate and complete can save you from unnecessary problems later on.

This is where tools like Xenett can be incredibly useful. 

Xenett helps by automating the process of reviewing and checking your financial documents, ensuring that all the details are correct before you file them. 

By using Xenett, you can reduce the chances of errors that could slow down your S corporation election.

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Misplaced Documentation: Keeping a Copy of the Form for Future Reference

After you’ve successfully filed Form 2553, it’s very important to keep a copy of the completed form for your records. 

If you lose this documentation, it can cause difficulties if you need to refer back to it later. 

For example, you might need it for tax filing, to confirm your S corporation status, or if the IRS has any questions. 

Make sure to store the form in a secure place, along with your other important business documents. 

Additionally, if you submitted the form by fax, keep the fax confirmation as proof that you sent it. 

Having all this documentation organized and easily accessible ensures you’re prepared if you ever need to verify your S corporation election.

Again, Xenett can help here by providing a secure and organized way to store all your important business documents. 

With Xenett, you can easily keep track of your forms and retrieve them whenever needed, helping you stay organized and avoid the stress of misplaced paperwork.

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Conclusion

Filing IRS Form 2553 is a smart move for many small business owners looking to save on taxes and simplify their business’s financial health. 

By electing S corporation status, you can avoid double taxation and potentially reduce your self-employment taxes, making it a valuable option to consider.

However, it's crucial to ensure that your business meets all the eligibility requirements and that you file the form correctly and on time. 

If you have any doubts or need personalized guidance, consulting with a tax professional is always a good idea.

That being said, if:

📝 Keeping track of your financial documents and ensuring everything is accurate before filing is giving you sleepless nights

Or,

🤔 You’re worried about making errors that could delay your S corporation election

Or,

😅 You need a secure and organized way to manage all your important business paperwork

…then try out Xenett for free. 

Xenett automates financial reviews, helps you spot errors before filing, and keeps your documents organized, making your tax filing process smoother and stress-free.

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