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Need help with an IRS Form 2553?
What is the IRS Form 2553?
IRS Form 2553 is a form used by a business entity that would like to be treated as an S corporation by the Internal Revenue Service for the purpose of taxes. This form, also called election by a Small Business Corporation, must be filed by any corporation that wants to be an S Corp. When a corporation is formed, it is classified as a C Corp by default until Form 2553 is filed.
Owners of an LLC may also file Form 2553 to elect to be taxed as an S Corp . Even though the LLC will be treated as an S Corp for tax purposes, it will still remain a limited liability company.
To read more about IRS Form 2553, click here.
Purpose of the IRS Form 2553
S Corportion taxation provides businesses with many tax benefits. Most notably, S Corps are not subject to double taxation like C Corps. C Corps are taxed at the corporate level and then shareholders are taxed again on any dividends or benefits they received throughout the year. This could include:
- Fringe benefits
An S Corp is called a pass-through entity , so it is not taxed at the corporate level like a C Corp. The corporation’s profits and losses pass through to the shareholders, who then must report their share of the profits and losses on their individual tax returns.
An LLC has the option to be taxed as a corporation to save on certain taxes. When an LLC is taxed like a partnership, the owner or owners are not considered employees for the LLC by the IRS even if they perform employee tasks running the company. They are simply considered owners and therefore self-employed.
When a person is self-employed, they must pay full Social Security and Medicare taxes. Together these are called self-employment taxes. An employee only pays a portion of these taxes, and then the balance is covered by the employer.
If an owner performs services for the corporation in an S Corp, they can be considered an employee. This individual will be classified as both a shareholder and an employee. Employees must be compensated for their services, and this compensation will be reported on the employee’s tax return, and they will pay Social Security and Medicare taxes on any salary they earn.
If an LLC files IRS Form 2553 to be taxed as an S Corp, members can now be considered an employee and classify some of their income as salary and some as a distribution from the company. The owner will still have to pay self-employment taxes on the salary, but only regular income tax on the distribution.
When these two incomes are divided correctly, the business owner could end up saving a large amount of money on self-employment taxes.
Who Needs to File an IRS Form 2553?
There are two business entities that generally file IRS Form 2553:
- Corporations that want to be classified as S Corps
- LLCs that wish to retain LLC status but be taxed as an S Corp
To be eligible to file, the company needs to meet specific criteria dictated by the IRS. These criteria include:
- The company cannot have more than 100 shareholders or members
- All shareholders/members must be US citizens or legal residents
- The corporation cannot have more than one class of stock
- The shareholders/members cannot be other corporations or partnerships
In addition, the company must adopt or change to one of the following tax years:
- Tax year ending on December 31
- Natural business year
- Ownership tax year
- Tax year elected under section 444
- A 52-53-week tax year that ends with reference to one of the other years previously listed
- Any other tax year (including a 52-53-week tax year) for which the corporation (entity) establishes a business purpose.
In addition, for a company to file to elect to be taxed as a corporation, all shareholders and members must agree to the election.
Some corporations are ineligible to file IRS Form 2553. These types of corporations are:
- A bank or thrift institution that uses the reserve method of accounting for bad debts
- A corporation that elects to be classified as a possessions corporation
- An insurance company subject to tax under subchapter L of the tax code
- A domestic, international sales corporation
How To File the IRS Form 2553
IRS Form 2553 can be filed with the IRS by either mailing or faxing the form. Currently, an online filing option does not exist for this form. There is no filing fee associated with this document, so it simply needs to be filled out correctly and submitted. Businesses usually receive a determination from the IRS as to whether their business qualifies for S Corp status within 60 days.
Once a company files Form 2553, and the IRS approves it, the election remains valid indefinitely. The company is not required to file IRS Form 2553 every year.
IRS Form 2553 is subject to deadlines, so a company that would like to file this form needs to be aware of these dates. This form must be filed:
- No later than two months and 15 days after the beginning of the tax year that the S Corp election is to take effect.
- Any time during the tax year prior to the tax year, the S Corp election is to take effect.
If a company fails to meet the filing deadline and still wants to elect to be taxed as an S Corp, there are some relief options. A business may be able to file IRS Form 2553 late if it meets the following requirements:
- The corporation prepared to file IRS Form 2553 by the deadline
- The corporation was not disqualified from becoming an S Corp for any reason other than missing the deadline
- The causefor missing the deadline is reasonable
- The corporation submits statements ensuring that all shareholders reported their income in a manner consistent with the corporation’s intention to file as an S Corp
Click here to read more about how to file IRS Form 2553.
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Costs Related to IRS Form 2553
IRS Form 2553 does not have a filing fee, however, a business owner should be aware that there can be some other costs associated with electing to be taxed as an S Corp. For example, if the company is using “business purpose” to justify its fiscal year, it will incur a $5,800 fee following filing Form 2553.
Taxes and S Corp treatment will vary by state, and you may need to file additional documents with your state department of revenue which could result in additional fees. If you have questions about your state’s laws regarding taxes and additional expenses you may incur, you can contact a corporate lawyer to assist you with filing the correct forms.
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