What is Form 2553?

Form 2553, also known as the “Election by a Small Business Corporation,” is a tax form used by small businesses in the United States to elect S corporation status for the purpose of federal taxation. By filing Form 2553, a corporation or other entity eligible to be treated as a corporation can choose to be taxed as an S corporation, which means that the income, losses, deductions, and credits of the corporation pass through to its shareholders for federal tax purposes. This allows the income of the corporation to be taxed at the shareholder level rather than at both the corporate and shareholder levels, potentially leading to tax savings.

Who Needs to File Form 2553?

Form 2553 is specifically designed for small businesses that wish to be treated as S corporations. To be eligible, the entity must:

• Be a domestic corporation or other entity eligible to elect to be treated as a corporation.
• Have only allowable shareholders including individuals, certain trusts, and estates but not partnerships, corporations, or non-resident alien shareholders.
• Have no more than 100 shareholders.
• Have only one class of stock.
• Not be an ineligible corporation, such as certain financial institutions, insurance companies, and domestic international sales corporations.

If all these conditions are met, the business can consider filing Form 2553 to elect S corporation status.

Benefits of Filing Form 2553

Filing Form 2553 and electing to become an S corporation can provide several benefits:

• Pass-through taxation: As mentioned, the primary benefit of S corp status is that profits and losses pass through to shareholders’ personal tax returns. This avoids the double taxation generally applicable to traditional C corporations.
• Tax savings for shareholders: Shareholders might be able to reduce taxable gains when selling the business if certain conditions are met.
• Employment tax savings: Shareholders who are also employees might save on self-employment taxes, as their salary from the S corporation is subject to employment tax, but their distributions (profit shares) might not be.

These benefits are crucial for small business owners wishing to maximize their after-tax income while maintaining a flexible business structure.

How to File Form 2553

To file Form 2553 and elect S corporation status, a company must complete and file the form with the IRS. The form requires such information as the name and address of the corporation, the tax year, information about the corporation’s shareholders, and their consent to the election. Here are the steps:

1. Obtain the latest version of Form 2553 from the IRS website.
2. Complete the form, ensuring all necessary information is accurate and included.
3. Have all shareholders sign the form agreeing to the election.
4. Submit the form to the IRS, either via mail or electronically, depending on the requirements at the time of filing.

The election must be made no later than two months and 15 days after the beginning of the tax year the election is to take effect, or at any time during the tax year preceding the tax year it is to take effect.

Common Mistakes When Filing Form 2553

Filing Form 2553 involves several intricacies that can lead to common mistakes:

• Missing the filing deadline: If you miss the filing deadline, it might delay your S corp status, potentially resulting in unwanted tax consequences.
• Incomplete or incorrect information: All required fields must be accurately completed, as any errors can cause delays or rejections of the form.
• Failing to obtain all shareholder consents: Ensuring that all shareholders sign the consent statement is crucial for the election to be valid.

It’s often advisable to consult with a tax professional or accountant when preparing and filing Form 2553 to avoid these potential pitfalls.

Conclusion

Form 2553 is a critical document for small businesses intending to take advantage of the benefits of S corporation status under United States tax law. Understanding the eligibility requirements, benefits, and filing procedures associated with this election can help business owners make informed decisions about their company’s tax treatment and potentially achieve significant tax savings. For detailed guidance and personalized advice, consulting with a tax expert or professional accountant is recommended.