If your business is a C Corporation but you have decided that you would rather file taxes as an S Corporation, you need to notify the IRS in advance by filing the appropriate paperwork. IRS Form 2553, “Election By a Small Business Corporation,” is required to be filed with the IRS to switch a C Corporation to S Corporation status for purposes of federal taxation. To understand how much you could save in taxes by forming an S Corporation, check out our S Corporation Tax Calculator.
Why is Form 2553 so Important?
It helps you reduce your tax liability. Instead of paying a corporate tax rate of up to 35 percent, Form 2553 turns your company into a “pass through entity” for tax purposes. This means the earnings from your company pass through directly to you (the owner) and any other shareholders, and you only have to pay taxes on the income at your own individual income tax rates.
When is Form 2553 Due?
According to the IRS’s instructions for Form 2553, if you decide to choose S Corporation status for tax purposes, you must complete and file Form 2553:
- No more than two months and 15 days after the beginning of the tax year the election is to take effect, (in general, this is March 15, unless your company has a differently-defined tax year) or
- For a shorter tax year lasting 2.5 months or less, Form 2553 must be filed by the 15th day of the 2nd month of the tax year (for example, if your business incorporated on November 1, your first tax year in business will be less than 2.5 months, which means you must file Form 2553 by Jan. 15 of the next year) or
- At any time during the tax year preceding the tax year it is to take effect or
- Later than these deadlines if you follow the rules for "Late S Corporation Election" (see details below).
So, it helps to plan ahead when filing Form 2553, but even if the new tax year has already started, you still have time to make the change – as long as you file the form by March 15th, or the other relevant deadline, depending on what is the start date of your tax year. If you need help, Incfile will prepare form 2553 with all S Corporation incorporation order submissions. This prepared form will be delivered with instructions for receiving the S Corp tax election status approval upon the completion of your state filing.
How Can I Get Relief for a Late S Corporation Election?
If you missed the deadline for filing Form 2553, don't worry — it might not be too late. According to the IRS instructions for Form 2553, if you meet certain conditions, you can file Form 2553 past the due date and still get IRS approval to make your S Corporation election apply retroactively to the beginning of your company’s tax year. In order to get approved for a late filing of Form 2553 your corporation must adhere to these conditions:
- The corporation must meet the eligibility criteria to be considered an S Corporation
- The corporation intended to be classified as an S Corporation as of the date entered on line E of Form 2553, but failed to qualify as an S Corporation solely because it did not file Form 2553 in a timely manner
- The corporation has reasonable cause for failing to file Form 2553 on time, or the failure to file was inadvertent
- All of the corporation’s shareholders have reported their income in a way consistent with the corporation’s intention to file as an S Corporation
When filing Form 2553 for a late S Corporation election, the corporation (entity) must write in the top margin of the first page of Form 2553 “FILED PURSUANT TO REV. PROC. 2013-30.”
What is IRS Form 8832 and Why Would I Need It?
IRS Form 8832 is necessary for situations where your business is an entity other than a corporation and you and you want to choose to be classified for federal tax purposes as an S Corporation, but you have not filed the usual paperwork within the specified timeframes. This situation is especially common for single-member LLCs (Limited Liability Companies) that want S Corporation status for tax purposes.
Form 8832 acts as a supplement to Form 2553 and lets you retroactively file both forms at once, getting retroactive classification and election as an S Corporation. But in order to qualify for relief from Form 8832, your corporation must meet these three criteria for eligibility:
- Your corporation must meet eligibility criteria to classify as an S Corporation and must have intended to be classified as an S Corporation as of the intended effective date of electing status as an S Corporation
- A domestic business entity other than a corporation (such as an LLC) would have qualified as a corporation but failed to file IRS Form 8832
- The only reason why your corporation failed to qualify as a corporation is because it failed to file Form 2553 in a timely manner, and the corporation can provide “reasonable cause” for failing to file Form 2553 in a timely manner
Get more details and instructions for Form 8832 here.
What is the IRS Definition of “Reasonable Cause?”
The IRS knows that people cannot always pay their taxes on time or file relevant forms on time; people make mistakes, forget about deadlines, and make understandable human errors. But if you need to file Form 2553 (or Form 8832) later than the expected deadline, you need to be prepared to offer a “reasonable cause” for why your forms were not done on time. Each case is judged individually, but the IRS can often accommodate your situation and provide relief from penalties if you can prove that your circumstances fall within the accepted IRS standards of “reasonable cause.”
According to the IRS, “reasonable cause” generally means evidence that the taxpayer “exercised ordinary business care and prudence, but was nevertheless unable to comply with a prescribed duty within the prescribed time” and/or “acted in good faith” or that the taxpayer's failure to comply “was not due to willful neglect.”
The IRS considers the following questions when determining whether you have reasonable cause for failing to file Form 2553, failing to pay taxes owed, or other tax compliance situations:
- What happened and when did it happen?
- During the period of time the taxpayer was non-compliant, what facts and circumstances prevented the taxpayer from filing a return, paying a tax, and/or otherwise complying with the law?
- How did the facts and circumstances result in the taxpayer not complying?
- How did the taxpayer handle the remainder of his or her affairs during this time?
- Once the facts and circumstances changed, what attempt did the taxpayer make to comply?
- Check out the IRS website for more details on Penalty Relief due to Reasonable Cause.
How Long Does it Take for Form 2553 to Get Approved?
Generally, the IRS will approve your Form 2553 filing (if you qualify for S Corporation status) within 60 days of your filing the form.
Are there Separate State Rules for Form 2553?
Yes. Not all states recognize Form 2553 for state income tax purposes, so you might need to file a separate form with your state tax authorities. Check with your state’s Department of Revenue or other relevant authorities, or ask your accountant for advice.
For more information on Form 2553, check out the IRS website.