The Secrets of IRS Form 2553: Everything You Need to Know

Check box Q2 to show that the corporation intends to make a backup section 444 election in the event the corporation’s business purpose request is not approved. This is an election to select a tax year other than the required tax year. S corporation status is the most popular choice for small companies due to the tax savings it can offer. It’s also a great choice for small businesses looking to scale, as the S corporation business structure allows for up to 100 shareholders. Form 2553 is an IRS form that a business entity must file to acquire S corporation status.

How does Form 2553 impact my business’s tax situation?

When filed as an S-corp, owners earn a traditional salary and receive “distributions” at specified times throughout the year. Owners pay income, Social Security and Medicare taxes on their ordinary salary. However, owners pay only income taxes on distributions—Social Security and Medicare taxes are not collected. If you are late filing Form 2553, it’s important to declare the reason on item I of Form 2553. Depending on the reason you provide, the IRS may grant relief. The earliest deadline for filing Form 2553 is no later than 2 months and 15 days after the beginning of the tax year the election for S corporation status will take effect.

Part III: Qualified Subchapter S Trust (QSST) election under Section 1361(d)(

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• If it does, make sure you provide an explanation as to why you’re filing late, either in the first line of Part I or in a separate letter that you attach to the form.
• If a single member limited liability company (LLC) owns stock in the corporation, and the LLC is treated as a disregarded entity for federal income tax purposes, enter the owner’s name and address.
• However, certain late elections can be filed attached to Form 1120-S.
• You’ll only need to complete part II if you selected box 2 or 4 in part I, in item F.
• Rather than being treated as a partnership for taxes, its members, Aakansha and Asia, decided to make an S-election but did so on May 15, 2022.
• Many LLCs will benefit most from the default LLC tax classification.

If your business is approved as an S corporation, you must keep a copy of your Form 2553 in your records, because you’ll need the form to file your taxes. Here at H&S Accounting & Tax Services, our customers rave about our uncomplicated, personalized approach to even the most complex tax situations, including the late election filing. We’re invested in every client’s success from start to finish – schedule a free consultation to experience the difference. IRS Notice 264 lists the reasons your S corporation election was denied.

S Corporation Election Eligibility

Note if you are filing Form 2553 late you must provide reasonable justification. Filing IRS Form 2553 and making the S corporation election under Section 1362 of the Internal Revenue Code enables you to avoid paying taxes at corporate and shareholder levels. The IRS may grant relief for late S-corp elections in certain circumstances.

• Put the date (Month/Day/Year) on which stock of the corporation was transferred to the trust.
• Instead, profits and losses are passed directly to shareholders to report on their personal tax returns.
• To be an S corporation beginning with its short tax year, the corporation must file Form 2553 during the period that begins November 8 and ends January 22.
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• If the corporation (entity) hasn’t received its EIN by the time the return is due, enter “Applied For” and the date the EIN was applied in the space for the EIN.

Scenario 1: Single-Member LLC – Direct S-Corp Election Without Form 8832

The following special rules apply in determining who must sign. If there is no corresponding day, use the close of the last day of the calendar month. For the latest information about developments related to Form 2553 and its instructions, such as legislation enacted after they were published, go to IRS.gov/Form2553.

Electing S corporation status using Form 2553 opens up game-changing tax benefits and operational flexibility that supercharges business success. As an S corp, your Income flows directly to shareholders instead of the business entity. This skirts double taxation for enhanced savings, transitioning from a C corp to a more favorable S corp tax structure.

What is a reasonable salary for an S corp?

An authorized officer of your corporation must sign and date Form 2553 for it to carry legal weight. Include the signer’s official officer title, such as CEO, President, Secretary, etc. Are you form 2553 instructions losing sleep over how to fill out the intricate Form 2553 to transform your company into an S corporation? This comprehensive guide breaks down everything you need to know about completing this crucial IRS form to unlock the multitude of advantages that S corps offer. You’ll receive Notice 261 if the IRS approves your election or Notice 264 if Form 2553 is denied. The IRS needs approximately two months to review the form and inform a business of its decision.

For more information on making these late elections, see Relief for a Late S Corporation Election Filed By an Entity Eligible To Elect To Be Treated as a Corporation, earlier. For an election filed before the effective date entered for item E, only shareholders who own stock on the day the election is made need to consent to the election. If this change qualifies as an automatic approval request (Form 1128, Part II), file Form 1128 as an attachment to Form 2553. If this change qualifies as a ruling request (Form 1128, Part III), file Form 1128 separately. If filing Form 1128, enter “Form 1128” on the dotted line to the left of the entry space for item E.

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Why would they want to file as an S-corp rather than as an ordinary corporation or LLC? If your goal is growing the business, then you want to reinvest as much of your earnings as possible. But if your business is generating a great deal of profit—profit you’d like to put in your pocket—then filing as an S-corp is the way to go. The United States tax system affords small business owners a great deal of flexibility when it comes to paying taxes.