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- 27 Feb 2023Zenefits Review
Form 2553, also known as the "Election by a Small Business Corporation," is a form that is used by small business corporations to elect to be taxed as S corporations. This type of corporation is a special type of business structure that is treated differently for tax purposes than a regular corporation.
This form is important because it allows small business corporations to avoid being taxed as regular C corporations, which can have higher tax rates.
Form 2553 was introduced by the Internal Revenue Service (IRS) to provide small business corporations with the option to be taxed as an S corporation, which can provide certain tax benefits.
This form is typically used by small business corporations that want to avoid being taxed as a regular corporation, which is often subject to double taxation.
By electing to be taxed as an S corporation, the business can avoid this double taxation and instead have its income and losses pass through to its shareholders, who are then taxed on their personal tax returns.
Form 2553 can be filed at any time, but it must be filed within the tax year in which the election is to take effect.
It's important to note that not all businesses are eligible to be taxed as an S corporation, so it's important to consult with a tax professional or refer to the instructions on Form 2553 to determine if your business is eligible.
To complete and file this form, you will need to follow these steps:
The IRS requires certain information from you and your business. This includes:
If you are filing Form 2553 to revoke a previous S corporation election, you will also need to provide the date on which the original election was made, as well as the reason for revoking the election.
You may also need to provide additional information, depending on your specific circumstances.
If you fail to file Form 2553 within two months and fifteen days, your S corporation election will not be valid for the current tax year.
However, the IRS does allow for a late election in certain circumstances.
If you have a valid reason for filing Form 2553 late, you can request relief from the IRS by attaching a statement along with your Form 2553 explaining the reason for the delay.
You can find the reasons for late filing that the IRS considers reasonable here.
The IRS will review your request and determine whether to grant relief from the late filing penalty. If you are granted relief, your S corporation election will be considered valid for the current tax year.
Electing to be treated as a corporation can have several benefits, including:
One of the biggest benefits of incorporating your business is that it provides limited liability protection to the owners of the business, also known as shareholders.
This means that the personal assets of the shareholders are generally not at risk in the event that the business is sued or incurs debt.
Incorporating your business can also give it a more professional image. This can make it easier to attract customers, clients, and investors and can also make it easier to negotiate deals and contracts.
Corporations are often able to take advantage of certain tax deductions and credits that are not available to sole proprietorships or partnerships.
For example, corporations can typically deduct the cost of employee benefits, such as health insurance and retirement plans, which can save the business money on its taxes.
This can be especially important if you are looking to obtain financing from banks or other lenders, as they are often more willing to lend to incorporated businesses than to unincorporated ones.
Another benefit of incorporating your business is that it can make it easier to transfer ownership of the business to new shareholders. This can be important if you are looking to sell your business or bring on new partners.
