IRS Form 2553: Benefits & Requirements for Small Business in USA

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When you apply for company registration in USA with the IRS, the default will be a C Corporation registered.

However, many businesses later decide to transform into S Corporation due its tax and other various benefits.

Having a C Corporation can be tough on small businesses because they might have to pay taxes twice due to double taxation (Tax Implication on both the Company and Business Owner).

But if they become an S Corporation, only the shareholders will pay taxes on the profits, not the corporation itself.

Hence, here comes the IRS Form 2553 helping small businesses to opt s corporation registration.

Let’s understand all about IRS Form 2553 in this post.

Purpose and Meaning of IRS Form 2553

To register as an S corporation in the USA, the companies need to use IRS Form 2553.

The main aim of IRS Form 2553 is to register the business as S Corporation instead of default C Corporation.

Major Difference between S Corporation vs C Corporation

Individuals who own an S Corporation report their share of income and losses on their personal tax returns.

Furthermore, business owners in S Corporation are taxed based on their individual tax rates.

On the other hand, C Corporations are subject to corporate-level taxes.

In addition, if dividends are paid out, shareholders are taxed again at their personal tax rates.

Eligibility Criteria to File IRS Form 2553

To register as an S Corporation by filling IRS Form 2553, a small business needs to meet some rules. These include:

  • The business should be a domestic corporation or entity.
  • All the owners or shareholders should be US Citizens or Individuals living in the US.
  • There can’t be more than 100 shareholders.
  • Shareholders should only be individuals, certain trusts, or tax-exempt groups.
  • The S corp must have one type of stock.

The final condition is that the business must choose or switch to one of these tax years:

  • December 31 as the tax year end
  • A tax year that follows the business cycle naturally
  • The tax year based on the owner’s tax year
  • A tax year selected under section 444
  • A 52-53 week tax year that ends along with one of the above tax years
  • Any other tax year (including a 52-53 week tax year) that the company can prove is needed for business reasons.

Ineligible Corporations for IRS Form 2553 Filing

Certain corporations are not allowed to file IRS Form 2553 to register as an S Corporation.

These corporations are:

  • Banks or thrift institutions that use the reserve method for bad debts accounting.
  • Corporations that have chosen to be treated as possessions corporations.
  • Insurance companies that are taxed under subchapter L of the Code.
  • Domestic international sales corporations.

How frequently is it required to file IRS Form 2553?

After the IRS approves the organisation to be treated as an S Corp, Filing of IRS form 2553 remains valid.

Therefore, business owners do not need to file Form 2553 every year.

However, the IRS Form 2553 has a deadline.

Furthermore, it must be filed on time for it to take effect for the current tax year.

A business has two options for filing Form 2553:

Option 1: No later than two months and 15 days after the beginning of the tax year that the S Corp election is to take effect.

Option 2: Any time during the tax year prior to the tax year the S Corp election is to take effect.

Need more information? Consult our professional CA.

Late Filing of IRS Form 2553 for Small Businesses : Relief Options

If a small business misses the deadline for filing Form 2553 and still wants to elect to be an S Corporation for the current tax year, there are relief options available.

The business must meet specific requirements.

This includes:

  • The corporation missed the deadline to file as an S Corp, but there was a valid reason for the delay.
  • The corporation was only disqualified due to the late filing and not any other reason.
  • All shareholders reported their income in line with the corporation’s intention to file as an S Corp.
  • The corporation submitted statements confirming the above.

Associated Costs for IRS Form 2553 Filing

Form 2553 can be filed  at no cost.

Though, there may be certain special conditions that incur a fee.

For example, a company using “business purpose” to justify their fiscal year will have to pay a $5,800 fee after filing the form.

Important Note: You can not file Form 2553 online and it must be sent to the Internal Revenue Service by mail.

In addition, depending on the state where the corporation operates, state taxes may apply, and additional documents may need to be filed with the state department.

If you are unsure about the laws pertaining to state taxes, it may be beneficial to seek the assistance of our experts by filling out the simple contact form given below.

Take a call from Expert

Benefits of  IRS Form 2553 for Small Businesses

The major three benefits of filing Form 2553 for small businesses are:

Protection of Personal Assets with an S Corporation

As a sole proprietor, your personal assets can be seized by creditors and those who sue you.

However, with an S corporation, the personal assets of all shareholders are safeguarded against such claims.

Avoiding Double Taxation with S Corporations

By passing on all its income, credits, and deductions to its shareholders who are then taxed at their individual tax rates, S corporations can avoid double taxation.

This also allows you to  have lower taxes than C corporations.

Simpler Transfer of Ownership with S Corporations

Compared to C corporations, transferring ownership in an S corporation is much simpler.

You can do it through a standard sales agreement.

IRS Form 2553: FAQs

How to check S Corp Status after filing IRS Form 2553?

Once you have submitted IRS Form 2553, you may inquire about the status of your corporation by contacting the IRS.

Typically, it takes approximately 60 days following submission to obtain a decision on your corporation status.

However, there may be various factors that can cause a delay.

If you suspect that your application has been delayed, it is advisable to directly reach out to the IRS.

Who is required to give their consent for an S Corporation election using IRS Form 2553?

All shareholders of a corporation must provide their consent for the S Corp election.

How can I confirm whether my corporation is registered as an S Corp or a C Corp?

If you are uncertain about the type of corporation under which your business is registered, you can call the IRS Business Assistance phone number listed on their website.

The IRS will review your records and inform you of your entity’s registration status.

Is it possible to submit IRS Form 2553 electronically?

No, there is currently no electronic filing option for this form.  However, you can contact E-StartupIndia at 8881-069-069 they will be able to file your IRS Form 2553 offline on your behalf while you provide them necessary documents online.

Also Read:

Difference between llc and s-corp

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