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.
When and Why was Form 2553 Introduced?
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.
The Process for Completing and Filing Form 2553
To complete and file this form, you will need to follow these steps:
Determine if your corporation or organization is eligible to make the S corporation election by checking the requirements listed in the instructions for Form 2553.
Collect the necessary information and documents.
Download a copy of Form 2553 from the IRS website or request a copy by calling the IRS at 1-800-829-3676.
Complete the form by filling in all the required information and signing it. Be sure to check the box in Part I to indicate that you are making the S corporation election.
Mail the completed Form 2553 to the address listed in the instructions for the form. It is important to file this form within the required time frame, which is within the first 75 days of the tax year for which you want the election to be effective.
Keep a copy of the completed Form 2553 for your records.
Information and Documents Needed to Fill Out Form 2553
The IRS requires certain information from you and your business. This includes:
Name of your company, address, and employer identification number (EIN)
The date your company started or will begin operations
The name and address of each person who owns at least 25% of the business
A statement that your business is a corporation or a limited liability company (LLC) and that you are electing to be treated as an S corporation for tax purposes
The date on which you want your S corporation election to take effect
The signatures of all the owners who own at least 25% of the business
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.
What if Form 2553 Is Being Filed Late
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.
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.
Benefits of Completing and Filing Form 2553
Electing to be treated as a corporation can have several benefits, including:
1. Limited Liability Protection
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.
2. Professional Image
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.
3. Tax Benefits
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.
4. Increased Credibility
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.
5. Easier to Transfer Ownership
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.