As a small business owner, your tax classification isn’t set in stone. So if you want your business to be taxed as an S corp, you’ll have to fill out IRS Form 2553.
Before we dive into the Form 2553 instructions, let’s answer the main questions business owners tend to ask about this essential tax form.
Why would I want to change my tax classification?
When you form a legal entity, like an LLC or C corp, the IRS automatically assigns your business a tax classification, each with its own set of rules.
This might not be ideal if you want a say in how your business is taxed. Your tax treatment directly affects how much tax your business and you, the owner, pays. Changing your tax treatment could help you save money on your small business taxes.
Here are the default tax classifications you’re assigned when you start any of the entities below:
|Business entity||Default tax classification|
|Single-member LLC||Sole proprietorship|
You may notice that an S corp isn’t one of the default tax classifications. To be taxed as an S corp, you need to request this tax treatment using Form 2553.
How are S corps and C corps taxed differently?
It comes down to one main difference: An S corp is a pass-through entity, while the C corp is not. As a pass-through entity, all of the S corp’s profit is passed on to the owner’s personal tax return.
That means a C corp needs to pay corporate tax on its profits, and S corp owners only pay personal income tax on their profits. C corp owners also pay taxes on a portion of the business’s profit, but only profit that have been distributed. This could lead to double taxation since both the entity and the owner pay taxes on the profits.
If a C corp owner doesn’t receive a distribution from the company (also known as a dividend payment), they avoid double taxation.
S corp owners pay taxes on the profit of their company regardless of whether the money is distributed to them. As a pass-through entity, S corp profits are automatically allocated to the owner’s tax return.
Finally, S corp owners are eligible for the 20% pass-through deduction while C corp owners are not.
What types of businesses are eligible to file Form 2553?
Think it’s time to switch over to S corp status? Corporations, single-member LLCs, and multi-member LLCs can all file Form 2553 so they can elect to be taxed as an S corp.
However, your entity must:
- Be a domestic corporation or entity.
- Have no more than 100 shareholders (these are owners of the business). You can treat an individual and their spouse as one shareholder, and you can treat all members of a family as one shareholder.
- Meet ownership requirements. Shareholders must be individuals, estates, or exempt organizations (like nonprofits). An S corp can’t be owned by another corporation or partnership.
- Meet resident requirements. Shareholders must be U.S. citizens, permanent residents, or resident aliens.
Certain types of businesses are not eligible for S corp election, including:
- Banks or financial institutions
- Insurance companies
- Domestic international sales corporations
Finally, your business needs to adopt a tax year ending on December 31 or another eligible type of tax year. A tax year is the annual accounting period which you use to report your income and expenses. Most businesses have a calendar tax year, which runs from January 1- December 31. However, there are other types of tax years your business can adopt.
S corps are allowed to use non-calendar tax years, but they must pass a test showing that they’re eligible. S corps can use natural tax years, ownership tax years, and business purpose tax year.
See Part II of our instructions for Form 2553 to learn more about tax years.
What types of businesses don’t need Form 2553?
|An LLC asking to be taxed as a C corp||Form 8832|
|A partnership requesting to be taxed as a C corp||Form 8832|
|A partnership or LLC taxed as a C corp requesting to go back to its default tax classification||Form 8832|
|A sole proprietor||Before you can request a different tax treatment, you’ll need to form an LLC|
What’s the deadline for filing Form 2553?
If you’re a newly formed business
You need to file Form 2553 within two months and 15 days of the date of your entity’s formation.
If you miss the filing window, you can still submit Form 2553, but you’ll receive the default tax treatment for the current tax year. Your new tax status will go into effect the following tax year.
Here’s what we mean. If you form your single-member LLC on January 1, 2020, you have until March 15 to file Form 2553 for the current tax year. If you file within this window, your company will be taxed as an S corp for all of 2020. If you don’t, you’ll be taxed as a sole proprietorship in 2020 and as an S corp in 2021.
If you’re an existing business
You must file Form 2553 within two months and 15 days of the beginning of the tax year that you want your S corp tax treatment to start.
For example, if you want your existing LLC to be taxed as an S corp in 2020, you need to file Form 2553 by March 15, 2020.
What’s the difference between Form 8832 and Form 2553?
It all comes down to the best tax treatment for your business.
|If you want your LLC or partnership to be taxed as a C corp||Form 8832|
|If you’re already taxed as a C corp and want to go back to your default tax classification||Form 8832|
|If you want your corporation, LLC, or multi-member LLC to be taxed as an S corp||Form 2553|
|A sole proprietor||Before you can request a different tax treatment, you’ll need to form an LLC|
If you’re filing Form 2553, you don’t need to complete Form 8832.
What happens after you submit Form 2553?
You’ll receive a letter from the IRS in the mail within 60 days after submitting Form 2553. If your S corp election is approved, you’ll receive a CP261 Notice. Be sure to make copies of this letter for your records.
If your S corp election is denied, you’ll receive a CP264 Notice. (This sounds nearly the same as the one you’d get if you were approved, but the numbers are different!)
After receiving a CP264 Notice, you’ll need to speak with an IRS agent to learn more about why you were denied and whether you should refile.
Step-by-step Form 2553 instructions
Before completing Form 2553, be sure your business is eligible for S corp status (see above). You don’t want to go through all the work of completing the form, only to find out you don’t qualify! If you have any specific questions on how your company should fill out this form, consult a small business attorney or accountant.
Part I. Election Information
The first section of the form is easy: Just fill out your business information. First write the name of your business as it appears on legal documents. If your business’s mailing address is the same as your personal address, enter “C/O” and your name after the name of the corporation. For example, “My Super Rad Business C/O Your Name.” Then enter your company’s mailing address.
From here, the form will walk you through the steps:
- A. Employer identification number (EIN): Put your company’s EIN here. If you don’t have an EIN yet, you must apply for one. If you’ve applied for an EIN but haven’t received it, put “Applied for” and the date you applied for it.
- B. Date incorporated: Write the date your business was incorporated or registered. You can find this information on your state’s formation documents.
- C. State of incorporation: Enter the state where you formed your business. For some business owners, like those who form a Delaware LLC, the state they registered in may be different than the state they actually do business in.
- D. Check if:
- Name: You’ve changed your business’s name after you applied for your EIN.
- Address: You’ve changed your business’s address after you applied for your EIN.
- E. Choose your election date: Enter the date you want your S corp tax status to start. If you’re making the election for your first tax year as a newly formed business, you should put the earliest of these dates:
- The date your business first had owners.
- The date your business first had assets.
- The date your business first began doing business.
Remember, if you missed the filing window for newly formed entities, your S corp election doesn’t begin until the following tax year. You will need to put the beginning date of that tax year.
If you’re making the election after your first tax year, enter the first day of the tax year you want your S corp tax treatment to start.
- F. Selected tax year: Choose the type of tax year your business will use. Most people will choose “calendar year.” If you think you need to choose something else, talk to an accountant or small business attorney. If you select box 2 or box 4, you’ll also complete Part II of the form.
G. Check if treating family members as one shareholder: If you have more than 100 shareholders, and some are family members, check this box. This will reduce your number of shareholders by treating members of a family as a single shareholder. If you don’t have more than 100 shareholders, leave this box blank.
- H. Enter contact information for a legal representative: This is the person the IRS will contact if they have questions about your form. (Hey, this might be you!) Be sure to include the person’s title too.
- I. Explanation of late filing: You can file Form 2553 after the deadline if you can prove you had a good reason for filing late. This area is where you make your case for why your form is submitted late and what actions you took once you realized you missed the filing date. You can enter your reason on the lines provided or on an attached statement. You must request late filing relief within three years and 75 days of the date entered on line E.
- Signature, title, and date: Form 2553 must be signed and dated by an officer authorized to sign, such as a president, vice president, treasurer, chief accounting officer, or another corporate officer.
On this page, enter the names and information of each shareholder required to consent to S corp election. If your business is a single-member LLC, then enter your information. If you need more rows, use additional copies of this page.
- J. Name and addresses of shareholders: Enter all the names and addresses of shareholders or former shareholders who are required to consent to the S corp election. If you file Form 2553 before the date on line E (the date the election will go into effect), you only need to list the current shareholders. If you file the form after the date on line E, list anyone who held stock between that date (the effective date) and the filing date (the election date).
- K. Shareholder’s signature: Each shareholder listed needs to sign and date under the consent statement.
- L. Stock owned: Each shareholder must list the number of shares they own or the percentage of the company they own as of the date of filing Form 2553. Also, enter the date each shareholder acquired their shares or ownership percentage. For a single-member LLC, the owner will own 100% of the company. For a multi-member LLC, the owners will enter the percentage of the company they own.
- M. Social Security number: Enter the Social Security number for each shareholder. If a shareholder is an estate, trust, or exempt organization, enter their EIN.
- N. Shareholder tax year ends: Write the month and day each shareholder’s tax year ends. For most individuals, this will be December 31.
Part II. Selection of Fiscal Year
You only need to complete Part II if you checked box 2 or box 4 on line F. If you selected calendar year, then you don’t need to fill out this section.
- O. Check the appropriate box for your business:
- 1. A new corporation adopting the tax year on line F
- 2. An existing corporation retaining the tax year on line F
- 3. An existing corporation changing to the tax year on line F
- P. Indicate type of tax year test you’re using
- Natural tax year: Natural tax years can be adopted by seasonal businesses that follow the natural cycle of business for that industry and end with a slow period. If choosing a natural tax year, you must attach 47 months’ worth of statements that show your gross receipts.
Examples of businesses that may have a natural tax year are summer vacation rental companies, ski resorts, and retail businesses that are busiest during December and January.
- Ownership tax year: Ownership tax years are based on the shareholder’s tax year preference. To qualify for an ownership tax year, shareholders with more than 50% of the stock must have the same tax year or be in the process of changing their tax year.
If you don’t check any boxes in section P, then you’ll need to complete section Q or R.
- Q. Business Purpose tax year: If there’s another reason you need a non-calendar tax year, use a business purpose tax year. Types of businesses that may choose a business purpose tax year are those that have an operating cycle that falls in different tax years. For example, a business that has an operating cycle that starts in the fall and ends in the spring would have this type of tax year.
- 1. Check here to request a tax year based on business purposes. Then attach a statement explaining why you have this tax year. See the instructions for Form 2553 for more information about what to include in your statement.
- 2. Check here if your business will make a section 444 election to have the tax year shown in Part I, line F. Section 444 is a tax code that lets businesses choose a tax year based on specific dates. Talk to an accountant if you need to make a section 444 election.
- 3. Check here if your business is willing to adopt a tax year ending December 31 if both your business purpose and backup fiscal year is denied.
- R. Backup fiscal year selection
- 1. Check this box if you plan to make a section 444 election. You will then need to complete Form 8716 and file it separately or attach it to Form 2553.
- 2. Check this box if you agree to adopt a tax year ending December 31 if your section 444 election is denied.
Part III: Qualified Subchapter S Trust (QSST)
A Qualified Subchapter S Trust is a trust that owns shares of an S corp and pays all of it’s income to the income beneficiary. This section won’t apply to most small businesses.
If you think you need to fill out Part III of Form 2553, definitely talk to an attorney or accountant.
Part IV: Late Corporate Classification Election
If you’re filing Form 2553 within the deadline, you can skip Part IV.
If you’re submitting late, then by signing Form 2553 you agree to the representations listed in Part IV. Representations are the eligibility requirements that you must meet in order to have late election relief.
Be sure to read through these representations carefully. If you don’t meet these requirements, your late election relief could be denied.
Finally, it’s time to submit Form 2553 to the IRS! You can mail or fax Form 2553 to the appropriate IRS center for your state. This IRS page has the most up-to-date information about where to fax or mail Form 2553.
And that’s your step-by-step guide to filling out Form 2553. Now you’re one step closer to setting up your very own S corp!