When a corporation decides it wants to be taxed like a partnership rather than face double taxation, Form 2553 is the gateway. This election fundamentally changes how the IRS treats your business income, allowing profits and losses to pass directly through to shareholders' personal tax returns instead of being taxed at the corporate level first. Understanding this form is essential for any small business owner considering S corporation status.
What Form 2553 Is For
Form 2553 allows qualifying corporations and certain other entities to elect S corporation status under Internal Revenue Code Section 1362(a). Rather than paying corporate income tax and then having shareholders pay tax again on dividends—the dreaded double taxation—an S corporation's income, losses, deductions, and credits flow through directly to shareholders, who report these items on their individual tax returns. The corporation itself generally avoids entity-level taxation, though it may still owe tax on certain built-in gains and passive income.
Eligibility Requirements
This election is available only to businesses that meet strict eligibility requirements. Your corporation must be domestic, have no more than 100 shareholders (with special counting rules for families), and have only allowable shareholders—individuals, certain trusts, and estates. Partnerships, corporations, and nonresident aliens cannot be shareholders.
The corporation must have only one class of stock, meaning all shares must provide identical rights to distributions and liquidation proceeds, although voting rights can differ. Additionally, certain types of businesses are automatically disqualified, including financial institutions using reserve accounting methods, insurance companies subject to special tax rules, and domestic international sales corporations.
IRS Form 2553 Instructions
When You’d Use Form 2553 (Late or Amended Elections)
Timing is critical with Form 2553. To have your S election effective for the current tax year, you must file no more than two months and fifteen days after the beginning of that tax year, or at any time during the preceding tax year. For a calendar-year corporation wanting S status starting January 1, the deadline would be March 15 of that year, or anytime during the previous calendar year.
First-Year Corporations
For corporations in their first year of existence, the deadline calculation starts from the earliest of three dates:
- When the corporation first had shareholders
- When it first had assets
- When it began conducting business
If your corporation begins operations on November 8, for example, you generally have until January 22 of the following year to file for S election effective from that first short tax year.
Late S Corporation Elections
If you miss the deadline, the IRS provides relief for late elections through Revenue Procedure 2013-30. To qualify for simplified relief, your corporation must demonstrate that it intended to be classified as an S corporation, failed to qualify solely because Form 2553 was not filed on time, has reasonable cause for the late filing, and acted diligently once the mistake was discovered.
Both the corporation and all shareholders must have consistently reported income as if the S election were in effect. Relief generally must be requested within three years and seventy-five days from the intended effective date.
When filing for late relief, write “FILED PURSUANT TO REV. PROC. 2013-30” at the top of Form 2553.
IRS Late Election Relief
Exceptions Beyond the Standard Deadline
An exception extends relief beyond the three-year-and-seventy-five-day window if the corporation filed timely S corporation returns, at least six months have passed since filing, and the IRS has not raised any questions regarding S corporation status within that period.
If your situation does not qualify for relief, you must request a private letter ruling, which involves substantial IRS user fees and a more complex approval process.
Key Rules You Need to Know
Shareholder Consent Requirement
Every person who owns stock on the date the election is filed must consent by signing and dating the form in Column K or on a separate consent statement. For late elections, anyone who owned stock at any time between the intended effective date and the filing date must also consent.
Special rules apply for:
- Community property spouses (both must sign)
- Joint tenants and tenants in common (each must sign)
- Trusts, estates, and minors (authorized representatives must sign)
Missing even one required signature invalidates the entire election.
One Class of Stock Rule
All outstanding shares must confer identical rights to distributions and liquidation proceeds. Differences in voting rights are allowed, but differences in economic rights are not. Creating preferred stock or special distribution rights generally violates this rule.
Shareholder Limit Rules
The 100-shareholder limit uses special counting rules. A husband and wife count as one shareholder, as do members of a family within six generations of a common ancestor if the family election is made.
Tax Year Requirements
Most S corporations must use a calendar year ending December 31. Exceptions exist for corporations that can establish a natural business year, an ownership tax year, or another valid business purpose. Requests that do not qualify for automatic approval require detailed justification and payment of a $6,200 user fee (subject to adjustment).
IRS S Corporations Overview
Step-by-Step Filing Process (High Level)
Step 1: Obtain an EIN and Confirm Eligibility
If you do not already have an Employer Identification Number, apply online at IRS.gov/EIN. Confirm that your corporation meets all S corporation eligibility requirements before filing.
Step 2: Complete Part I of Form 2553
Enter your corporation’s legal name, address, EIN, and desired effective date. Select your tax year and complete the shareholder information table, listing each shareholder’s ownership details and tax year-end.
Step 3: Collect Shareholder Consents
Each shareholder must sign and date Column K or provide a properly completed consent statement. Attach continuation sheets if you have more shareholders than the form allows.
Step 4: Complete Additional Parts if Needed
- Part II: Required only if requesting a fiscal tax year
- Part III: Used for Qualified Subchapter S Trust (QSST) elections
- Part IV: Used for late entity classification elections when applicable
Step 5: File the Form and Retain Proof
Mail or fax the original signed form to the appropriate IRS Service Center based on your corporation’s location. Keep copies of the form and proof of filing with your permanent corporate records.
IRS Form 2553 Instructions
Common Mistakes and How to Avoid Them
Missing Shareholder Signatures
Even one missing consent invalidates the election. Create a checklist of all shareholders and verify every required signature before filing.
Incorrect Effective Dates
Entering the wrong effective date can cause the election to apply to the wrong tax year. Carefully determine the correct date based on when your corporation first existed or the tax year you intend to convert.
Missing the Filing Deadline
The two-month-and-fifteen-day deadline often catches new corporations off guard. Calendar the deadline immediately upon incorporation and set multiple reminders.
Entity Classification Errors
LLCs must first be classified as corporations before electing S status. Failing to make the proper entity classification election can invalidate Form 2553.
Inadequate Late Election Explanations
When filing late, vague explanations are often rejected. Provide a detailed, specific explanation of the circumstances that caused the delay and the steps taken to correct it.
What Happens After You File
The IRS generally responds within 60 days. Fiscal year requests require additional review and can take up to five months.
If the Election Is Accepted
You will receive an acceptance letter confirming your S corporation status and effective date. Begin filing Form 1120-S for all tax years starting on or after that date and issue Schedule K-1s to shareholders.
If You Receive No Response
If you do not hear back within the expected timeframe, contact the IRS Business & Specialty Tax Line at 1-800-829-4933. Do not assume silence means approval.
If the Election Is Rejected
The IRS will explain the reason for rejection. Depending on the issue, you may be able to correct the deficiency and refile or request reconsideration.
Once effective, S corporation status continues indefinitely until revoked or terminated. Revocation requires shareholder consent, and re-election is generally barred for five years without IRS approval.
FAQs
Can I fax Form 2553 instead of mailing it?
Yes. The IRS accepts faxed elections, but you should retain the signed original and fax confirmation as proof of filing.
What if one shareholder refuses to sign?
Without unanimous consent, the election cannot proceed. You must resolve the ownership issue or continue operating as a C corporation.
How can I prove timely filing if the IRS says it wasn’t received?
Acceptable proof includes certified mail receipts, private delivery service tracking, fax confirmations, or an IRS acceptance letter.
Can an LLC file Form 2553?
Yes, but only after it is classified as a corporation. Most LLCs must file Form 8832 before or with Form 2553.
What if we had an ineligible shareholder?
The election is invalid for that period, but relief may be available for inadvertent violations under IRC Section 1362(f).
Do I need to refile Form 2553 if ownership changes?
No. The election remains in effect, but new shareholders must be eligible and understand the tax consequences.
How do I revoke S corporation status?
Shareholders holding more than 50 percent of stock must consent and file a revocation statement with the IRS. Revocation timing affects when the change becomes effective.
