What Form 2553 Is For
Form 2553 allows a small business corporation to inform the Internal Revenue Service that it wishes to elect S corporation status for federal tax purposes. This election changes how businesses report income and helps avoid double taxation at the corporate level. Upon filing this form, the corporation transfers its corporate income to its shareholders, who then report their respective shares on their individual tax returns. Limited liability companies can also use Form 2553 when they choose S corporation treatment.
Visit our IRS Form Help Center to learn more about key IRS forms your small business may need beyond Form 2553.
When You’d Use Form 2553
You use Form 2553 when a corporation or LLC wants to elect S corporation status for federal tax purposes. This election affects how the business reports income and how shareholders pay tax on their share of earnings. Common situations include:
- New corporations: Used when a newly formed business wants S corporation treatment starting on the first day of its tax year. Filing early helps the election take effect immediately.
- Existing corporations: Used when a business wants to change from C corporation rules to S corporation rules for the next tax year.
- Short-year entities: Used when a company formed late in the year wants the election to apply during its initial short tax period.
- Limited liability companies: Used when an LLC chooses S corporation tax treatment instead of the default classification, allowing income to pass through to members.
- Late election filers: Used when a business misses the original deadline but qualifies for relief under Revenue Procedure 2013-30. The IRS requires reasonable cause and proper documentation before accepting a late election.
Learn more with our Business Tax Relief page to learn more about federal programs and resolution options available to small businesses navigating IRS requirements.
Key Rules or Details for 2017
To qualify for S corporation status under the 2017 rules, a business must meet several eligibility requirements set by the IRS. Key points include:
- Business type: The company must be a domestic corporation. Financial institutions using special accounting methods, insurance companies, and domestic international sales corporations cannot make the election.
- Shareholder limits: The corporation may have no more than 100 shareholders, thereby maintaining a closely held business.
- Eligible shareholders: This includes individuals, estates, and certain qualifying trusts that are permitted to own S corporation stock.
- Ineligible shareholders: Partnerships, corporations, and nonresident aliens are not permitted to hold shares, ensuring the business remains a domestic pass-through entity.
- Stock structure: The corporation must issue only one class of stock, although voting rights may differ among the shares.
- Consent requirements: Every shareholder must sign a valid consent statement. Spouses in community property states may also need to sign.
- Authorized signature: A secretary, officer, or authorized representative must sign the IRS form for processing.
- Special filings: Companies requesting a fiscal year must complete Part II, and some may also need to file qualified subchapter trust elections or related forms.
Step-by-Step (High Level)
When a corporation files Form 2553, it is making a formal election to be treated as an S corporation. At a high level, the process looks like this:
- Gather basic details: Confirm the business entity name, Employer Identification Number, incorporation date, state where it was incorporated, and your chosen tax year (usually a calendar year). Prepare a comprehensive shareholder list that includes addresses and Social Security numbers for each shareholder.
- Complete Part I: Enter the corporation’s information, the date you want S corporation status to begin, and all shareholder details. Ensure that the election information aligns with your records and filing requirements.
- Collect shareholder consent: Have each shareholder sign the consent statement in Part I or on an attached statement.
- Review special sections: Use Part II, Part III, or Part IV only if you are requesting a fiscal year, making a qualified subchapter trust election, or fixing a late election.
- Send the form: Mail or fax Form 2553 to the Internal Revenue Service Service Center listed in the separate instructions. The IRS does not allow you to e-file this form, so the corporation must send a paper or faxed copy before the due date.
Common Mistakes and How to Avoid Them
Businesses filing Form 2553 (2017) often face delays or rejections due to avoidable errors. Here are the most common issues and their corresponding prevention strategies.
- Missing the Due Date: Form 2553 must be filed within 2 months and 15 days after the start of the tax year. Mark the deadline early and submit the form as soon as possible.
- Incomplete Consent Statements: Missing shareholder signatures will result in the IRS rejecting the election. Use a checklist to confirm that every required consent statement has been signed.
- Incorrect or Missing EIN: Filing without a valid EIN or entering the wrong number will delay processing. Apply for an EIN in advance and double-check the number before filing.
- Incorrect Effective Date: Selecting an effective date that does not align with your incorporation or tax year can result in the election being denied. Verify the correct date with your records before submitting the form.
- Ignoring Part II: Companies that request a fiscal year often overlook the explanation required in Part II. Always complete Part II when selecting a fiscal year instead of a calendar year.
- Submitting an Unsigned Form: The IRS will not process Form 2553 unless an authorized officer signs it. Ensure the form is fully signed before mailing or faxing it.
Review our Penalty Abatement page for options to address IRS penalties tied to late filings, incomplete elections, or signature oversights.
What Happens After You File
Once your corporation files Form 2553, the Internal Revenue Service reviews the election and typically issues a written notice within about 60 days. This letter confirms whether your S corporation status has been approved and the effective date of the approval. If approved, the corporation begins filing Form 1120S for the applicable tax year. If the election is denied, the notice explains the issue so you can correct the filing or request late election relief.
FAQs
Can Form 2553 be used to change a corporation's status with the IRS?
Yes, Form 2553 allows a small business to elect S corporation treatment, which changes how the corporation reports its income and how shareholders pay federal taxes.
What counts as reasonable cause for missing the Form 2553 due date?
Reasonable cause may include illness, incorrect guidance from a tax professional, or delays caused by missing election information. The IRS expects the business to correct the issue as soon as it is discovered.
Can limited liability companies use this IRS form to elect S corporation treatment?
Yes, limited liability companies may file Form 2553 if they qualify and want to be taxed as an S corporation instead of using the default rules for their business entity.
How long does it take the IRS to process Form 2553 and review the filing requirements?
Processing usually takes about 60 days. If the IRS requires additional information or identifies issues with the filing requirements, it will send a notice explaining what needs to be corrected.
Do I need to file other forms when making an election by a small business corporation?
Most corporations only need Form 2553, but some may need other forms for a qualified subchapter trust or entity classification. The IRS instructions explain when an extra filing is required.
