Form 2553: Essential Steps for Small Business Tax Election

Part II is completed if you are a late filer, detailing the reasons for the delay. Double-check that all fields are filled accurately to avoid errors. Form 2553 should be filed within 2 months and 15 days of the beginning of the tax year for which the election is to be effective. This means that if the tax year begins on January 1st, IRS Form 2553 must be filed by March 15th.

S corporations vs. LLCs

If the election is to be made for a short tax year, the corporation must file Form 2553 during the period that begins November 8 and ends January 22. As an S Corp shareholder, you get to take distributions as well as a salary. And those distributions are only subject to income tax, NOT Social Security and Medicare taxes. After you make an S Corp election, you put yourself on payroll (this is a requirement for S Corp owners; more on that later) and pay yourself a salary of $40,000.

How to file IRS Form 2553 with TaxAct

By making this election, a C corporation can avoid double taxation on corporate income. An LLC owner may be able to pay less in self-employment taxes by filing as an S corp. S corporations are a form of business entity that uses pass-through taxation What Is The Form 2553 For Your Business to pass their income, losses, credits, and deductions to shareholders. As a result, the S corporation shareholders report their income and losses on their owners’ personal income and personal tax returns at individual tax rates instead of the corporate tax rate.

• This choice can greatly benefit small businesses by letting income, losses, deductions, and credits pass directly to the shareholders’ personal tax returns.
• Effective June 18, 2019, the filing address has changed for Form 2553 filers located in certain states.
• Make sure to use the right fax number for your state to avoid delays.
• A late election to be an S corporation generally is effective for the tax year following the tax year beginning on the date entered on line E of Form 2553.
• LLCs and partnerships enjoy additional tax advantages when they make an S-election.

Form 2553: When and Why You Should File It

Gather shareholder consent, as all shareholders must consent to the S corporation election. Organizing these materials beforehand will streamline the filing process. Your entity must meet certain conditions to qualify for S Corporation status. Your business must be a domestic corporation with only allowable shareholders, which include individuals, estates, and certain trusts. It cannot have more than 100 shareholders, and only one class of stock is permissible. Not all businesses can file Form 2553 and make an S corporation election.

The corporation (entity) will also be notified if its election isn’t accepted. The corporation (entity) should generally receive a determination on its election within 60 days after it has filed Form 2553. If box Q1 in Part II is checked, the corporation (entity) will receive a ruling letter from the IRS that either approves or denies the selected tax year. When box Q1 is checked, it will generally take an additional 90 days for the Form 2553 to be accepted. Generally, send the original election (no photocopies) or fax it to the Internal Revenue Service Center listed below.

Form 2553 S Corp, also called “election by a small business corporation,” is an important IRS form that allows domestic corporations and LLCs to choose S corporation status for federal taxes. This choice can greatly benefit small businesses by letting income, losses, deductions, and credits pass directly to the shareholders’ personal tax returns. An S corporation is distinct from a C corporation primarily in its tax treatment. An S corporation elects a special tax status that allows income, losses, deductions, and credits to pass through to shareholders, who report them on their personal tax returns. This avoids the double taxation typically faced by C corporations, where income is taxed at both the corporate and shareholder levels. The corporation itself pays corporate income taxes on profits at the corporate tax rate.

Each shareholder’s name, address, tax identification number (SSN), and shares/ownership percentages must be listed. Enter the number of shares of stock each shareholder owns on the date(s) the election is filed and the date the stock was acquired. An LLC should enter the percentage of ownership and date(s) acquired. Under Item F, check the box that corresponds with the S corporation’s selected tax year.

Tax filing

• To understand why this is important, let’s first talk about C corporations.
• If you miss this original deadline, you may be able to qualify for late election relief.
• Shareholders of S Corporations actively involved in the business can reduce their self-employment tax liability.

Under the default LLC tax structure, owners who work in the business are self-employed and report their share of LLC income and expenses on their personal tax returns. They also pay self-employment (Medicare and Social Security) taxes on the full amount of the LLC’s profits. For small business corporations, this form represents a strategic decision.

Timeline

Businesses, including LLCs, look for inventors when capital is low. Operating agreements outline the terms for adding capital contributions to the owners of an LLC. An LLC with more than one member is known as a multiple-member or LLC. All members must sign off on the firm’s written operating agreement to run legally. Besides that, setting up this type of LLC is similar to its single-member counterpart.

Start by providing your election information at the beginning of Part I, including the corporation name, EIN, and address. Make sure you use the actual name of the entity that’s in the corporate charter. As a business owner, you have many responsibilities, especially when you’re starting a new business.

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Each shareholder must provide accurate details, including their names, addresses, and Social Security numbers. Incomplete or incorrect information can result in processing delays. Engage with tax services or CFO services early in the process to ensure you’re on track. The deemed owner of the QSST must also consent to the S corporation election in column K of Form 2553. If the corporation (entity) hasn’t received its EIN by the time the return is due, enter “Applied For” and the date the EIN was applied in the space for the EIN.

Eligibility Requirements for S Corporation Status

An entity without stock, such as a limited liability company (LLC), should enter the percentage of ownership and date(s) acquired. The effective date of your S corporation election is determined by the date you submit your Form 2553. For a newly-formed business, the election can be effective for the current tax year if filed within 75 days of the formation. Existing businesses must ensure their election is filed in a timely manner for it to be effective in the desired tax year. If aiming for a particular tax year, careful planning around the formation date and filing timeframe is vital to align with your business’s financial strategies.