Learn more about what Form 2553 is in business.
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Form 2553 is the document that you file with the Internal Revenue Service (IRS) if you want to elect an S corporation tax status. There can be significant tax benefits for small businesses that file Form 2553. Below, we discuss the Form 2553 definition, the advantages of filing Form 2553, and the requirements for becoming an S corporation.
When you incorporate a business, by default, the IRS treats the company as a C corporation. However, it can elect to become an S corporation as long as the business meets the IRS’s requirements. Corporations must file Form 2553 — Election by a Small Business Corporation — to make this change.
Filing Form 2553 offers advantages in terms of tax treatment for the corporation. Let’s look at the difference between how a C corporation and an S corporation are taxed.
The IRS treats C corporations as separate, tax-paying entities. The corporation itself pays income taxes on profits at the corporate tax rate. Then, shareholders pay income taxes on any dividends they receive. These shareholder taxes are calculated at the individual’s tax rate. This process is known as double taxation because it essentially taxes the same income twice.
S corporations, on the other hand, are considered pass-through entities. Any profits, losses, credits, and deductions pass through to the owners, who report everything on their personal tax returns. The S corporation doesn’t pay its own income taxes. Instead, the owners pay the taxes as their personal income tax. This tax treatment is called pass-through taxation. Small business owners find this method of taxation advantageous because they often pay less in taxes and have more money left to reinvest back into the company.
Not all corporations can file Form 2553 and make an S corporation election. The IRS has strict requirements and limitations.
For a corporation to qualify for S corporation status, it must:
For more details about the IRS’s requirements, read through the Instructions for Form 2553.
Depending on when you want the election to take effect, you can file Form 2553 at two different points during the year. If you want the election to be effective during the current tax year, you must file Form 2553 within the first two months and 15 days of that year. If you file the form anytime after that, the S corporation status will go into effect during the next tax year. Check out the instructions for Form 2553 for examples of the different filing times. In limited situations, the IRS makes exceptions for late filings.
Keep in mind that your state of incorporation may require you to file additional forms, so check the state’s department that handles business formations.
S corporation status isn’t a default — but something you must intentionally elect with the IRS. To do this, the company must meet certain requirements and file Form 2553.
If you’re ready to start an S corporation, check out our S Corporation Formation Service. Our experts are standing by to file the paperwork quickly and accurately. We have everything you need to start and run your own business, including our Worry-Free Compliance Service. Let us know how we can help you create your dream business.
Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.