U.S. Income Tax Return for an S Corporation Form 1120-S. Do not file Form 1120-S unless the corporation has filed Form 2553, Election for Sub S status
IRS Form 2553, “Election By a Small Business Corporation,” is required to switch a C Corporation to S Corporation status for purposes of federal taxation.
Businesses can file IRS Form 2553, Election by a Small Business Corporation and elect to an S corporation instead of a C corporation. The election allows a small business to register as an S corp rather than a C corp, and this comes with significant tax benefits that can save your company money during tax season.
Why you’d want to file Form 2553? One significant benefit of electing to become an S corporation is that an S corp’s net taxable income, in general, is taxed to the shareholders of the corporation, not the corporation itself. The income is shown on the shareholders’ returns and is taxed at their tax rates. S corporations can also write off start-up losses.
Additionally, an S corp’s net income is only taxed once. C corps, on the other hand, can potentially be taxed twice—at the corporate and shareholder level if dividends are paid out.
Who qualifies to make an S-Corp election? There are quite a few requirements a business must meet to qualify. Form 2553 requirements include:
- The business is a domestic corporation or entity.
- All shareholders are U.S. citizens or residents. There are no non-resident shareholders.
- There are no more than 100 shareholders. Members of a family may be treated as one shareholder in this count.
- The only shareholders are individuals, estates, certain exempt organizations, or certain trusts.
- The business has only one class of stock.
- The business has or will change to one of the following tax years:
- A tax year ending December 31
- A natural business year
- An ownership tax year
- A tax year elected under section 444