IRS Form 2553, Election by a Small Business Corporation, is filed by a corporation or other eligible entity to make an election to be an S corporation under section 1362(a). Corporations are treated as C corporations unless the proper steps are taken to become an S corporation. Here’s a quick look at what you need to know if you’re helping a small business client who wants to make an S corp election.
One significant benefit of electing to become an S corporation is that an S corp’s net taxable income, in general, is taxed to the shareholders of the corporation, not the corporation itself. The income is shown on the shareholders’ personal returns and is taxed at their personal tax rates. S corporations can also write off start-up losses.
Additionally, an S corp’s net income is only taxed once. C corps, on the other hand, can potentially be taxed twice—at the corporate and shareholder level if dividends are paid out.
As great as an S corp election may sound, not all small business clients will qualify to make the election. There are quite a few requirements a business must meet in order to qualify. Those requirements include:
The business also must not be one of the following ineligible corporations:
Additionally, Form 2553 should be filed on time. If you file it late, you have some relief options that we talk about later in this post.
For more detailed information about the requirements to make an S corp election, you can check out the IRS Form 2553 instructions.
In order for Form 2553 to be filed on time, it must be filed:
Relief is available for late elections, but only if several conditions are met including:
Again, you should review the IRS resources and their Form 2553 instructions to be sure your client meets every qualification for late election relief. If they do meet the qualifications, you should file Form 2553 with FILED PURSUANT TO REV. PROC. 2013-30 written at the top and attach a statement explaining reasonable cause. Form 2553 and the statement must be signed by every shareholder.
Want more tips for filling out IRS forms? Check out The Ultimate Guide to IRS Forms.