Choosing to have your business taxed as an S Corporation can open the door to valuable tax benefits. However, to do that, you’ll need to submit IRS Form 2553. This election is especially important for business owners looking to optimize their tax strategy. Whether you’re running a small LLC retail shop or planning to convert a sole proprietorship to an LLC, this guide will walk you through who should file Form 2553, why it matters, and how to fill it out without the stress.
What Is IRS Form 2553 and Why Is It Important
The Internal Revenue Service Form 2553 is used by eligible small businesses to elect S Corporation status for federal tax purposes. By default, corporations and LLCs are taxed either as C corporations or sole proprietorships, depending on how they’re set up. However, filing Form 2553 allows a business to change its tax classification and avoid double taxation by passing income, losses, and credits directly to shareholders.
This election can be especially useful for businesses looking to reduce self-employment taxes and simplify how profits are reported on tax returns. Without filing this form, your business will be taxed under the default IRS classification based on your entity type.
Who Needs to File IRS Form 2553
Form 2553 is typically filed by corporations and LLCs that want to be treated as an S Corporation. To be eligible, your business must meet specific IRS requirements, including:
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Being a domestic corporation or eligible LLC
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Having no more than 100 shareholders
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Having only allowable shareholders, such as individuals or certain trusts
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Using only one class of stock
Both new and existing businesses can file, but the timing of your submission will affect when the election takes effect. It’s important to understand the filing window to avoid delays or default tax treatment.
Benefits of Filing Form 2553 and Electing S Corporation Status
Electing S Corporation status through Form 2553 can provide several financial and operational benefits. One of the biggest advantages is avoiding double taxation. Unlike C Corporations, S Corps do not pay corporate income tax. Instead, profits are passed through to shareholders and taxed at the individual level.
Additionally, S Corporation owners may be able to reduce self-employment taxes by paying themselves a reasonable salary and taking remaining profits as distributions. Other potential benefits include simpler ownership structures, easier transfer of shares, and credibility with investors or lenders.
IRS Form 2553 Instructions: How to Fill It Out Step by Step
Part I – Election Information
This is the most important section of this form and must be completed by all businesses electing S Corporation status. Here are helpful 2553 instructions to help you fill out Part I properly:
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Enter your business details
Fill in the legal name, street address, date of incorporation, state of incorporation, and EIN. If your EIN is still pending, write “Applied for.” -
Check the box in Section D
Do this only if your business changed its name or address after applying for your EIN. -
Enter the effective date of the election
If it’s your first tax year, use the earliest date of: -
When your business acquired shareholders
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When it acquired assets
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When it began operations
Otherwise, use the start date of the tax year for which the election applies.
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Choose your tax year: Most businesses use a calendar year (box 1). If you check box 2 or 4 for a fiscal year, you’ll also need to complete Part II.
Part II – Selection of Fiscal Year (If Applicable)
This section is only required if your business wants to use a fiscal year instead of the standard calendar year.
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Check the box that applies
You’ll be asked to indicate why you're requesting a fiscal year that ends on a date other than December 31. Common reasons include: -
Natural business year
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Ownership tax year
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Business purpose (must be explained)
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Attach additional forms if needed
If you're selecting a fiscal year for a business reason, you may need to include: -
A written statement explaining your reasoning
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Form 8716 or Form 1128 (depending on your situation)
Tip: Most new businesses can skip this section and use the calendar year. If you’re unsure, talk to your accountant before filing.
Part III – Qualified Subchapter S Trust Election (If Applicable)
You only need to complete this section if one or more shareholders in your business is a Qualified Subchapter S Trust (QSST). Most small businesses with individual shareholders can skip this part. If these conditions apply to your situation, here are Form 2553 instructions for Part III:
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Provide the name and address of the trust
This includes the trust’s full legal name and mailing address. -
List the current income beneficiary
You’ll need to enter the name and Social Security Number of the individual who receives the trust’s income. -
Get a signature from the authorized representative
The beneficiary or authorized party must sign to consent to the election.
Tip: If your business has no trusts as shareholders, leave this part blank and move on to Part IV.
Part IV – Late Election Relief Explanation (If Needed)
This section is only required if you are filing the 2553 Form after the IRS deadline, but still want your S Corporation election to apply to the current tax year.
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Explain why the form is being filed late
Write a short, clear statement explaining the reason for the delay. Common examples include misunderstanding the deadline, administrative oversight, or unintentional errors. -
Confirm the intent to elect S Corporation status on time
Your statement should also affirm that your business intended to file the election on time and that all shareholders have been acting as if the S Corp election were in effect (e.g., taking distributions, running payroll). -
Include supporting documentation if possible
While not always required, including evidence that your business has been operating as an S Corp (such as financials, payroll records, or previous tax filings) can improve your chances of receiving late election relief.
Tip: The IRS often grants late election relief if the explanation is reasonable and the business has clearly operated as an S Corp since the intended effective date.
What Happens After You File IRS Form 2553
After you file Form 2553, the IRS will review your application and typically respond within 60 days. If approved, you’ll receive a confirmation notice stating when your S Corporation status takes effect.
If the IRS needs more information, they’ll contact you by mail. Be sure to keep a copy of your filed form and watch for any follow-up requests. If you don’t hear back within two months, you can call the IRS Business and Specialty Tax Line to check the status.
Once approved, your business will be taxed as an S Corporation starting on the date listed on the form or another date approved by the IRS.
Final Step: Set Your Business Up for Tax Success
Filing IRS Form 2553 might seem intimidating at first, but once you understand the purpose and process, it becomes a straightforward way to take control of how your business is taxed. Whether you're forming a new LLC or making the leap to S-Corp status after choosing to convert a sole proprietorship to an LLC, this form can be a smart move toward long-term savings. Just be sure to file on time, double-check your details, and consult a tax professional if needed—your future self (and your finances) will thank you.
