What is Form 2553? How to Save on Small Business Tax as an S Corporation
When a business owner decides to register their small business as a corporation with the Internal Revenue Service, by default, they are incorporated as a C corporation. Businesses can file IRS Form 2553, Election by a Small Business Corporation and elect to form an S corporation instead of a C corporation. Form 2553 allows a small business to register as an S corp rather than a C corp, and this comes with significant tax benefits that can save your company money during tax season. S corporations aren’t subject to double taxation the way C corporations can be and an S corporation’s income is taxed to its shareholders, not to the corporation itself.
These topics explain what Form 2553 is and how S corporation status can benefit small businesses:
NOTE: FreshBooks Support team members are not certified income tax or accounting professionals and cannot provide advice in these areas, outside of supporting questions about FreshBooks. If you need income tax advice please contact an accountant in your area.
What is the Purpose of Form 2553?
The purpose of Form 2553 is to allow small businesses to register as an S corporation instead of as a C corporation. Making an S election can potentially provide tax savings to a small business owner, depending on a number of factors. The taxation of an S corp is more similar to that of a partnership or limited liability company (LLC), rather than a C corp. The most common reason small businesses file Form 2553 is for tax purposes.
An S corporation is only taxed once, whereas a C corporation can be subject to double taxation under certain circumstances. That means a C corp can be taxed both at the corporate level and the shareholder level, if it pays out dividends.
An S corporation’s net taxable income is taxed to the company’s shareholders, rather than to the corporation itself. That income appears on a shareholder’s personal tax return and is therefore taxed at their personal tax rates.
What Are the Eligibility Requirements for an S Corporation?
Not every small business is eligible to elect for S corporation status. These are some of the main eligibility requirements for making an S election:
- Your corporation must be domestic
- The corporation can’t have more than 100 shareholders
- Your corporation can’t have any nonresident alien shareholders
- The corporation must not have more than one class of stock
- In most cases, the shareholders must be individuals, estates, and exempt organization, and not corporate entities
- The corporation must file Form 2553 on time
While these are the main legal requirements, there are other guidelines S corp are required to follow that you can review in full on the IRS website. Once you’re sure your corporation meets all the S corp requirements, you can read the Form 2553 instructions and file the completed form with the IRS.
After filing your Form 2553, the IRS will send a written ruling letter that notifies the corporation whether its S corporation election was approved or rejected.
When Should I File Form 2553?
Small businesses must file Form 2553 with the IRS within a specific time period in order to be considered for S corporation status, as mandated by law. Here are the details of when your business must file Form 2553:
- Form 2553 must be filed no later than two months and fifteen days after the start of the tax year in which the S corporation will take effect. For the upcoming tax season, that filing deadline will be March 15, 2020.
- Form 2553 can be filed at any time in the tax year before the S corporation is to take effect. So, if you plan to elect for S corp status in 2020, you can file Form 2553 at any point in 2019.
Under certain necessary conditions, small businesses may be able to file a late election past the March 15 deadline. These necessary conditions include:
- The corporation planned to file as an S corp by the intended effective date
- The only reason the corporation failed to file is because File 2553 wasn’t filed on time
- The corporation has a reasonable explanation for missing the filing deadline
- All shareholders reported their income in line with the corporation’s intention to elect for S corp status, and the corporation has documentation to prove it
How Do I Get a Copy of My Form 2553?
If your business is approved as an S corporation, you need to keep a copy of your Form 2553 in your records, because you’ll need the form in order to file your taxes. If you misplace Form 2553, you’ll need to contact the IRS to request a new copy. Here’s how to get a copy of your Form 2553 so you can file taxes as an S corp:
- First, make sure you’re authorized to conduct business transactions on behalf of the corporation.
- Next, call the IRS Business and Specialty Tax line at 1-800-829-4933, which offers services to small businesses looking for tax assistance. Their hours of service are 7am to 7pm in your state time zone.
- Request a copy of Form 2553. You’ll need to confirm your identity by providing identifying information, including your corporation’s name and address, your name and role within the company, your Employee Identification Number (EIN) and the business’s contact details.
- When you receive the copy of your Form 2553, be sure to file it away with your other tax documents and corporate records so you can refer to it when needed.