Forming an S Corporation and Filing IRS Form 2553

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If you don't take the extra step of electing S corporation status when you form your business then the Internal Revenue Service assumes that it's a C corporation. Your business will pay a corporate income tax on its net taxable income for the year unless you take an additional step of filing IRS Form 2553.

Forming an S Corporation

If your company meets the eligibility criteria for being an S corporation and you've decided that you want to elect that status, then you must prepare and file Form 2553, Election by a Small Business Corporation, with the Internal Revenue Service. The form requires the signature of each shareholder.

The form notifies the IRS that you want to elect S corp status, and the IRS will then send a letter back to your corporation confirming its election for this tax treatment.

First, however, you must incorporate your business by drawing up articles of incorporation, by-laws, and the various required legal documents to form and operate your business. These can vary by state. You should incorporate the business in the state where the company will conduct the bulk of its business.

When to Submit Form 2553

Form 2553 must be filed before the 16th day of the third month of the corporation's tax year, or before the 15th day of the second month of a tax year if the tax year is 2½ months or less. You can also file the form at any time during the tax year before the year in which you want the election to take effect.

You can file at any time after these deadlines if your corporation follows special rules for making a late S corporation election. Here are some examples:

  • ABC Corporation incorporated on July 1. ABC therefore has until October 16 to file Form 2553 for the S corporation election to be valid for the company's first year of operation.
  • DEF Corporation incorporated on November 1 so its first tax year would be less than 2½ months long—November 1 through December 31. DEF therefore has until January 15 of the following year to file Form 2553 for the S corporation election to be valid for the company's first year of operation.
  • GHI Corporation has been incorporated for several years and is currently taxed as a C corporation. GHI can file Form 2553 by December 31 if the company wants to convert to an S corporation in the following year.

    Procedures for Late Elections for S Corporation Status

    A corporation can file Form 2553 after the due date and still receive IRS approval to make the election retroactive to the beginning of the corporation's tax year.

    Normally, if a corporation files Form 2553 after the 15th day of the third month of its tax year but before the 15th day of the third month of the following tax year, the IRS considers the S corporation election to be valid for the following tax year, but not valid for the preceding tax year.

    But first, the corporation must make sure that it is eligible to make a late election. It must meet S corporation eligibility criteria, and it must have intended to be classified as an S corporation as of the intended effective date of the S corp election.

    In addition, the corporation can only have failed to qualify as an S corporation because it did not file Form 2553 in a timely manner, and not for any other reason. It must have reasonable cause for missing the deadline, but the IRS is pretty generous in this regard. Inadvertently failing to file Form 2553 is considered reasonable cause.

    The corporation must also provide statements that each of its shareholders have reported their incomes in a manner inconsistent with the corporation's intention to file as an S corporation. If your corporation meets these requirements, you should write the following at the top of Form 2553:

    "FILED PURSUANT TO REV. PROC. 2013-30."

    Attach a statement indicating that the corporation either had reasonable cause or inadvertently failed to file Form 2553 in a timely manner. Explain the circumstances in detail. Both Form 2553 and the attached statement must be signed by each shareholder. 

    Reasonable Cause

    Reasonable cause refers to the specific facts or circumstances that caused the forms to be filed late. Be sure to address the following points when you're writing a reasonable cause statement: 

    • What happened and when did it happen?
    • What facts and circumstances prevented it during the period of time that the business entity had not yet filed the forms?
    • How did these facts and circumstances result in the forms not being filed on time?
    • How did the business entity handle the remainder of its financial and tax affairs during this time?
    • What attempt did the business entity make to correct the situation when the facts and the circumstances changed?

    When the Business Entity Was Required to File IRS Form 8832

    IRS Form 8832 is used by business entities other than corporations that elect to be classified as S corporations for federal tax purposes. A common example is a single-member limited liability company. Ordinarily, this type of company would be treated as a disregarded entity. The single member liability company could elect to be treated as a corporation instead, and then subsequently elect to be treated as an S corporation.

    Sometimes the single member limited liability company does not elect to be treated as a corporation and does not to elect to be treated as an S corporation within the prescribed time frames. Fortunately, the IRS has developed procedures that permit such taxpayers to retroactively file both elections. This procedure also applies to other tax entities, such as associations formed as partnerships and any business entity that would not normally be classified as a corporation for federal tax purposes.

    Under this procedure, business entities must request both retroactive classification as corporations and retroactive election as S corporations. The business entity must prepare Form 8832, including Part II, and it must also prepare Form 2553, including the reasonable cause statement in section H of Part I and the required representations found in Part IV.

    You can refer to the Instructions for Form 2553, the Instructions for Form 8832, and Revenue Procedure 2009-41 for additional reference material relating to the retroactive relief for both classification as a corporation and S corporation status.