Guide to IRS Form 2553 - How To Save on Small Business Taxes

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Fincent Team

Tax compliance is a key part of running any business. However, if you run a smaller business, chances are taxes eat into a sizable portion of your profits. This is why tax planning is crucial for small businesses.

Special tax designations can help your small business save on taxes and help you scale up in the long run. And that's where Form 2553 comes in.

What Is IRS Form 2553?

A business that files for incorporation with the IRS is designated as a C corporation by default. However, this tax designation isn’t very tax-efficient. It makes sense to have your business incorporated as an S corporation to potentially save on taxes.

IRS Form 2553 is what helps you elect to be taxed as an S corporation instead of the default C corporation status.

Eligibility Requirements for Filing Form 2553

Not every business can elect to be designated as an S corporation through IRS Form 2553. The IRS prescribes specific requirements that your business needs to meet to be eligible for the S corporation tax designation:

  • Your business is currently taxed as a C corporation.
  • It must be classified as a domestic corporation that is based in and operates in the United States.
  • The company must not have any partnerships or other corporations as shareholders, and all shareholders must be citizens of the United States.
  • The business must not have more than 100 shareholders.
  • It can only have one class of stock.
  • Your company cannot be an ineligible corporation that includes certain financial institutions, insurance companies, and domestic international sales corporations.

How to File Form 2553

The IRS Form 2553 is available as a free download from the IRS website. However, it cannot be filed online and must be mailed or faxed to an IRS Center.

Once you’ve downloaded the form, you can begin carefully filling in each of the four parts.

Part I: Election Information

This section requires you to provide the following information about your business:

  • Name and address of the business
  • State where the business was incorporated and the date of such incorporation
  • Employer Identification Number (EIN)
  • Names and contact information of officials in your corporation who the IRS can contact for any correspondence concerning your form
  • The tax year you would like your business to be designated as an S corporation.

Under normal circumstances, Form 2553 must be filed within two months and 15 days from the beginning of the tax year for your business.

In case this period has lapsed, you can still file the form by providing information about the delay under Item I. Pay attention to Part IV of the form if this applies to you.

Part II: Selection of Fiscal Tax Year

This section allows you to choose your tax year if you checked boxes (2) or (4) in Item F of Part I. You can either choose to retain your existing tax year or change it from or to the calendar year.

You may choose your natural business year or ownership tax year by completing Item P (1) or (2), respectively.

You can also request a fiscal tax year without completing item P if it is for a specific business purpose, along with a backup Section 444 election vide Item R. The business can opt for a regular Section 444 election by completing Item Q.

Part III: Qualified Subchapter S Trust (QSST) Election Under Section 1361(d)(2)

This section only applies to trusts applying for the S corporation tax designation.

If this section is relevant to your trust, fill in the following:

  • Beneficiary’s name, address, and Social Security Number (SSN)
  • Name and address of the trust and the EIN

Part IV: Late Corporate Classification Election Representations

This section is relevant only if you’re making your application past the deadline period, which is two months and fifteen days from the commencement of the tax year.

If your business uses the calendar year as the tax year, your deadline would be 15th March of the same year.

How Do I File a Completed IRS Form 2553?

As stated earlier, IRS only allows filing Form 2553 through mail or fax.

The Department of the Treasury Internal Revenue Service Center is situated in two locations. You can send the original copy of the form to the address that corresponds with the location of your corporation's principal business, office, or agency.

The fax number and mailing addresses are given below:

What Is the Deadline to File Form 2553?

You are permitted to file Form 2553 any time of the year. The IRS has not laid down a particular date as the deadline to file the form. However, when you file the form determines how soon the IRS grants your company the S corp status.

If you want your company to elect the S corp tax status, you need to:

  • Either file the form during the year preceding the tax year the election has to take effect, or
  • File it within 2 months and 15 days after the beginning of the tax year the election is to take effect.

If you consider the calendar year as tax year (ending on 31st December) for your business, the last date to file the form would be 15th March, 20XX.

For example, you will need to file the form before 15th March 2022 if you want the S corp election to take effect from January 2022 retroactively. But if you file it after the 2.5-month window, your company won't be elected as an S corp until 2023.

What Happens if I File the Form Late?

The IRS has certain provisions for granting S corp status in case of a late filing in a few scenarios. You may be eligible to file Form 2553 late if:

  • The company intended to be elected as an S corporation by the intended effective date, i.e., the date entered on line E of Form 2553.
  • The company has a reasonable cause to not timely file the form.
  • The company and its shareholders reported their incomes per S corporation status and, in a way, consistent with the company's intention to be elected as an S corp for the same tax year - providing proof of the same.

How Long Does the Processing Take and When Can I Expect to Hear Back?

The IRS is usually quick to respond with a status update on your application. You can expect to hear back from them within 60 days of filing your form.

In case you don't, you can always reach out to the IRS here.

Also understand the requirements of W2 and W4 forms for small business.

How Do I Get a Copy of My Form 2553 From the IRS?

If your business is granted the S corp status, you will need to keep a copy of your Form 2553 handy as you will need it when you file your taxes.

In an event that you lose your Form 2553, you can file a request with the IRS to get a new copy. Follow the steps below to do so:

  1. Call the IRS Business and Specialty Tax Line at 1-800-829-4933 during their working hours (7 AM to 7 PM in your state's time zone).
  2. Request for a copy of the form.
  3. Identify yourself with your name and role within the company, your corporation's name and address, your EIN, and your business' contact details.

If you are planning to start a small business, Understand different types of startup expenses which will help you launch successfully.

In Closing

Filing for the S corp status comes with various tax benefits for your business. The IRS has laid down the process of filing Form 2553 in detail on its website.

Another way to maximize savings for your small creative business is to hire a professional bookkeeping service like Fincent. We handle all your accounting and money management needs so you can devote your undivided attention to creative pursuits and growing your company.

Discover how our team of bookkeepers can help you make sound financial decisions.

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