As a business owner, you have many responsibilities, especially when you’re starting a new business. One of the first things you have to do is select a tax classification for your business or entity.
If you want to classify your business as an S corporation (known as an S-Corp), you must file Form 2553. Different tax rules and regulations apply when you’re an S-Corp, helping you save on taxes and protect your personal assets.
Before you can file IRS Form 2553, you have to meet S-Corp requirements. Keep reading to learn more about Form 2553, S-Corp status, and how you can benefit by switching to an S-Corp.
Form 2553 and Form 8832 explained
Form 2553, Election by a Small Business Corporation, is the tax form used to elect to treat your entity or business as an S corporation. There are several advantages you can enjoy as an S corporation — particularly when it comes to business taxes.
While Form 8832 is used to make an election as a sole proprietor, partnership, or C-Corp, you need to file Form 2553 to declare your business as an S-Corp.
Unlike Form 8832, there’s a deadline for filing Form 2553 to become an S-Corp. The deadline to file this form is 2 months and 15 days after your tax year, which means the deadline is March 15 if your business uses the calendar year as its tax year.
You can still file small business taxes if you don’t file Form 2553, but you’ll use the default tax status for your entity. If you miss the deadline, you can file before the next deadline to make an election as an S-Corp.
Are you eligible? S corporation status criteria
Forming an S-Corp can help your business in several ways, but there are eligibility requirements.
To form an S-Corp, the entity you’re electing must be a domestic corporation or a domestic entity eligible to elect to be treated as a corporation. Foreign businesses will need to choose a different tax status as they are not eligible to form an S corporation.
Shareholders are another key factor in becoming an S-Corp. You must have no more than 100 shareholders in total, and those shareholders can’t be partnerships, corporations, or non-resident aliens.
You’re only eligible for S-Corp status if you have only one class of stock. This means that all the stock your corporation offers has to provide the same rights and distributions.
Lastly, certain types of corporations are excluded from S-Corp status. This includes certain financial institutions, insurance companies, and domestic international sales companies.
Like other small business tax forms, Form 2553 needs to be signed by any authorized corporate officer.
The advantages of electing S-Corp status
Your tax status determines how:
- Your business is taxed
- Your business operates
- Ownership is established and transferred
Choosing the right tax status can help you save money and protect your assets.
With an S-Corp, shareholders aren’t responsible for business debts. This means that personal assets like homes, vehicles, and bank accounts are protected.
Pass-through taxation means you can save money when tax season arrives. S-Corps aren’t taxed at the federal level — instead, the income is reported on your personal income tax return. The S-corp will issue each owner a Schedule K-1 that is reported on your personal income tax return. When you’re just getting started, you can use business losses to offset personal income.
Many C corporations use the accrual method of accounting, but S corporations can typically use the cash method of accounting. The cash method can be used when the business has average annual gross receipts of $3029 million or less for the 3 prior tax years and isn’t a tax shelter. Cash accounting makes it easier to keep track of everything because you’re only looking at money that was sent or received.
Shareholders can receive tax-free distributions up to the amount they invested in your company. However, they are often considered employees and must receive a reasonable salaryies from an S corporation.
If you decide to transfer ownership of an S-Corp, you can do that without negative tax implications. You don’t have to worry about complex rules and regulations.
Filling out Form 2553: Step-by-step
Form 2553 is fairly straightforward, but you don’t want to make any mistakes if you’re submitting close to the deadline. In this section, we’ll take you through step-by-step Form 2553 instructions to make sure you’re filling everything out accurately.
As we mentioned earlier, S-Corp filing dates are based on what your business considers a tax year. If you use the calendar year as your tax year, the deadline to submit Form 2553 is March 15.
Part I
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.
If you changed your business name or address after applying for the EIN you provided, check one of the boxes on line D.
For line E, enter the date that your election as an S-Corp becomes official. This is based on when you started your business and what you consider a tax year.
Line F allows you to select the tax year your business uses. Options include the calendar year, a fiscal year ending on any month and day, a 52-53-week year ending in December, and a 52-53-week year ending in another month.
If you checked boxes 2 or 4 on line F, you need to complete Part II on page 3 of Form 2553.
If you have more than 100 shareholders but are treating family members as a single shareholder to reduces that number below 100, check the box on line G and see page 2 in the instructions.
Next, provide the name and number of an officer or legal representative the IRS can contact if they have more questions.
In the event you are making a late S-corp election, before you sign and date the bottom of the page, you can explain why you’re filing late if you missed the deadline.
On the 2nd page,provide a list of shareholders for your corporation along with their ownership information, Social Security number or Employer Identification Number, shareholder tax year-end, as well as their signed consent.
Part II
If you checked boxes 2 or 4 on Line F, you need to complete this section. If you checked one of the other boxes, you can skip Part II.
In this section, you simply need to check all the boxes that apply to your situation. If you don’t know which boxes to check, refer to the instructions or consult a tax expert.
Part III
This section only applies to qualified subchapter S trusts (QSST). If you’re not making an election as a QSST, you can ignore this section.
Part IV
Part IV only applies if you’re making a late election as an S-Corp.
Form 2553 key deadlines and late filing justifications
When it comes to filing Form 2553 for S-Corp status, March 15 is an important date to remember. If your corporation uses the calendar year as its tax year, you must file Form 2553 by March 15 to make an election to be recognized as an S-Corp.
If your tax year isn’t the calendar year, you have 2 months and 15 days after your tax year to make an election. This is why it’s important to select the right type of tax year on line F in Part I.
You can still file Form 2553 late in many cases. For example, some corporations file late because the president or CEO doesn’t file the election in time. Some corporations get an exception because a tax expert forgot to file on time.
You may even be able to file Form 2553 late if executives or shareholders didn’t know filing as an S-Corp was an option until the deadline had passed.
Do you need to file a 2553 form for both federal and state taxes?
Whether you’re turning your hobby into a business or operating a large organization, following tax laws is vital. Depending on the state you live in, you may need to file a 2553 form for both federal and state taxes.
If you don’t know how to file Form 2553 or whether you need to file it with your state and federal taxes, our tax experts can evaluate your situation and help you make the right choice.
Other forms you may need as an S-Corp
Once you make an election as an S-Corp, there are certain tax forms you’re required to file. You can use small business tax tools to keep track of these forms and file online — and some forms may not apply to you.
Form 1120-S is the tax form you use to report your income, losses, gains, deductions, and credits for your S corporation. Schedule K-1 is the form used to report the income, losses, and other financial information of the S corporation for its shareholders to report on their return.
You also need to pay employment taxes if you are an employee and have employees in your business, which means you need to file quarterly payroll tax returns (such as Form 941 and the payroll returns applicable in your state), as well as Form 940 each year. If your business has agricultural employees, you can file Form 943.
Whether you’re a shareholder or owner of an S-Corp, you have responsibilities when tax season arrives. If you don’t know which tax forms you need to file or you’re confused about a particular section, get help from one of our tax experts.
No matter what moves you made last year, TurboTax will make them count on your taxes. Whether you want to do your taxes yourself or have a TurboTax expert file for you, we’ll make sure you get every dollar you deserve and your biggest possible refund – guaranteed.
