IRS Form 2553: The Complete Guide to S-Corporation Election 

Changing your business structure can increase revenue and lower the federal tax burden. The IRS treats all corporations as C corporations for tax purposes, often leading to double taxation.

Filing IRS Form 2553 and making the S corporation election under Section 1362 of the Internal Revenue Code enables you to avoid paying taxes at corporate and shareholder levels.

This election is only available to some corporations, and your business must meet specific criteria before you can become eligible to file IRS Form 2553.

The IRS can only accept the S corporation election if your business meets the requirements or if Form 2553 is completed correctly.

In this guide to S corporation election, we’ll show you how to fill out this form and benefit from switching to a different business structure.

A Glance at Section 1362(a) of the IRC

It would help if you didn’t jump at the prospect of reducing your tax burden before fully understanding the implications of IRC Section 1362(a).

An S corporation is a pass-through business entity that enables shareholders to report income, losses, and deductions on tax returns they file as individual taxpayers.

This section of the IRC states that a small business corporation can elect to become an S corporation unless the election is a violation of the regulations presented in Section 1362.

However, all shareholders must consent to the election because the S corporation election is invalid if one or more shareholders fail to give their consent.

The section doesn’t define a small business, while the IRS assigns small business designations to companies based on individual tax law statutes. However, corporations with over a hundred shareholders are ineligible for the S corporation status.

Besides the size, the industry and annual revenue are also among the factors determining if a company can qualify for a small business designation.

S Corporation Election Eligibility

The requirements a corporation must meet to become an S corporation are extensive. Here’s an overview of the criteria your business must meet before you can File Form 2553.

• Domestic corporations and entities that meet the corporation eligibility criteria.
• A corporation must have less than a hundred shareholders.
• Corporation’s shareholders must be individuals, estates, qualifying trusts, or exempt organizations (Section 401(a) or Section 501(c)(3).
• All shareholders must be US Citizens or residents.
• Corporations with more than one class of stock are ineligible for S corporation election.

The Business must switch to a tax year ending on December 31, an ownership tax year, and elect a Section 444 tax year, to make the election. The business also needs to choose a natural business year or opt for a 52/53-week tax year which ends with reference to one of the previously mentioned tax years.

What’s more, a corporation can elect any other type of tax year if it can establish a purpose for such an election.

The following types of businesses cannot make the S corporation election:

• Insurance companies taxed under Subchapter L of IRC.
• Thrift institutions and banks that utilize the reserve accounting method for bad debts under Section 585.
• A domestic, international sales corporation (DISC) or former DISC business.

IRS Form 2553 Filing Deadline

Business owners must obtain articles of incorporation, create company bylaws, register EIN, and gather all other documents necessary for registering and running a business before preparing Form 2553.

A C corporation, LLC, or any other eligible business entity can file Form 2553 at any point during a tax year prior to the year during which the S corporation election should become effective.

The filing deadline is two and a half months after the start of the tax year, during which the election should go into effect. Consequently, small businesses must file this form by March 21 if their tax year starts on January 7 or March 15 if their tax year begins on January 1.

Businesses that miss the filing deadline can still qualify for late election relief, but only under the following circumstances:

• The corporation can reasonably explain the filing of the form after the deadline.
• The corporation must plan to switch to the S classification by the date indicated on Line E of Form 2553.
• The corporation provides statements showing that all its shareholders reported their income per S corporation regulations.

Please note that these aren’t the only conditions under which the IRS might grant your organization the late election relief.

Completing IRS Form 2553

Although the form has four parts, you must complete just the first two sections unless you missed the filing deadline or you’re making the S corporation election for a qualified Subchapter S trust (QSST).

Part I – Election Information

This portion of Form 2553 collects information about the business, its shareholders, and the officer or legal representative the IRS can contact for additional information.

The business name, EIN, state and date of incorporation, and address should be entered at the top of the form. Also, you must check the appropriate box if the business changed its name or address during the EIN application.

Afterward, you should specify when the S corporation election should become effective and select one of the tax year options in Section F.

Corporations with over a hundred shareholders can still qualify for the election if treating family members as single shareholders reduces the number of shareholders below this threshold. In this case, you must check the Section G checkbox.

The corporation’s legal representative must sign and date the first page of Form 2553.

Shareholders’ names, social security numbers, and the percentage of stock they own in a corporation should be listed on the form’s second page. Each shareholder must sign Shareholder’s Consent Statement and enter the date they signed it.

This portion of the form should also indicate when each shareholder acquired their stock and when their tax year ends.

Part II – Selection of Fiscal Tax Year

Completing this portion of Form 2553 is straightforward because you only have to check the appropriate boxes to indicate whether the corporation is:

• Adopting a new tax year type from Line F in Part I
• Retaining a previously used tax year type
• Changing the tax year type entered on Line F.

Afterward, you can proceed to make a Section 444 election if the IRS rejects the corporation’s business purpose explanation or check the appropriate box to adopt, retain or change the corporation’s tax year type.

Part III – Qualified Subchapter S Trust Election

You’ll need the income beneficiary’s name and SSN to make the Subchapter S trust election. You must also provide the trust’s name, address, EIN, and the date when the corporation’s stock was transferred to the trust.

The legal representative or the income beneficiary should sign and date this part of the form.

The final portion of the form only lists the requirements for late election relief. You must look at the Form 2553 instruction booklet to find additional information regarding the steps you must take to make the S corp election if you missed the filling deadline.

Revoking the S Corporation Election

You’ll receive Notice 261 if the IRS approves your election or Notice 264 if Form 2553 is denied. The IRS needs approximately two months to review the form and inform a business of its decision.

Once approved, the election remains valid indefinitely, so you don’t have to file Form 2553 annually. To change the corporation’s classification, shareholders must submit the statement of revocation to the IRS office, where they file their tax returns.

Besides explicitly stating that the shareholders revoke the S corp election, the statement should also contain the S corporation’s name and EIN, information about each shareholder’s stock, and their names and TINs.

The statement’s due date is the sixteenth day of the third month of the tax year, provided the revocation is effective from the tax year’s first day.

If the revocation becomes effective on any other date, the IRS must receive the statement before the date indicated in the statement.

Frequently Asked Questions

Reducing the Tax Burden with IRS Form 2553

Making the S corporation election unlocks a sea of opportunities. Besides tax advantages, the pass-through business structure allows shareholders to reduce their business expenses and borrow money.

Preparing IRS Form 2553 and sending it to the IRS is the first step towards reclassifying your business, but remember that all shareholders must agree with this decision. The IRS will deny the request if just one of the shareholders refuses to sign the consent statement.

Moreover, you must ensure that your business meets the requirements for the S corporation classification because some companies don’t qualify for this election due to their structure or number of shareholders.