Taxpayers who owe more than $1,000 to the IRS can be penalized. Making all of your payments throughout the year will help you avoid penalties. Filing Form 2553 late will result in a failed election.
You can have a penalty in one quarter, or for all four. However, you must make your payments by the next business day to avoid penalties. If you have missed several payments, you could be penalized for the entire year.
You can present defenses to avoid penalties if you have been unable to file your tax return for more than six months. Whether you file in late January or six months after the deadline, you should present a clear timeline of events, as well as any supporting documentation.
If you have missed multiple payments in a row, you may be able to get a penalty waiver if your past performance was particularly exceptional. You should make estimated payments and adjust your withholding to avoid penalties in the future.
Filing Form 2553 Late
IRS civil penalties are the least severe, but they can add up. Generally, they amount to 1/2% of the tax amount for each month, with a maximum of 25% of the total tax amount owed. If you wait ten days after the IRS’s intent to levy your tax, you may incur a penalty of 1%. If you file an extension, you can avoid paying a penalty entirely by entering into an installment agreement.
If you’ve filed Form 2553 late, you may wonder why the IRS still allows this type of filing. While the Internal Revenue Code permits late Form 2553 filings for “inadvertent” reasons, it’s important to understand that late filings are not automatically excused.
Form 2553 has a special section on the first page where the company must explain why the filing was late, and what steps they took to remedy the situation. You must complete this section under penalty of perjury.
To make an election, the corporation must meet certain criteria and show reasonable cause for missing the filing deadline. The IRS does not specify what “reasonable” means, but generally speaking, if the corporation missed the deadline, it must try to file the forms as soon as possible.
It must also state that each shareholder has reported income inconsistently with the intended election of S corp status. While the deadlines for filing Form 2553 are tight, it’s still a good idea to make an effort to file if you have the time and inclination.
Even if you’ve filed the Form 2553 and received the approval letter, it doesn’t mean that the IRS will grant you S corporation status. Failure to file Form 2553 on time can result in a tax audit and a penalty. If you think you are late for filing, contact the IRS for more information. There’s no reason to worry, however – you can always contact the IRS and explain the situation.
Tax Benefits of S-Corporations
Despite the many advantages of an S-Corp, it may not be for everyone. S-corporations are not partnerships and must have US-resident shareholders in order to qualify for the tax benefits.
In addition, they are subject to double taxation – a corporate income tax and a personal income tax for the shareholders. Additionally, S-corporations cannot pass on profits to the shareholders, so they are less attractive to venture capitalists.
An S-Corp tax advantage is that shareholder-shareholders receive dividends from the business. Unlike C-corporations, employee-shareholders can take these dividends and distribute them tax-free to the extent of their basis, which is the amount of money invested in the corporation. However, if a shareholder dies while the S-Corp is still operating, they may lose their right to receive a tax-free distribution of profits.
S-corporations can save a business owner thousands of dollars in taxes. By setting up the self-employment tax system, an S-corporation can avoid paying a corporate income tax of 21%.
In addition to avoiding double taxation, S-corporations must file annual or quarterly Forms 1120s and distribute a Schedule K-1 form to their shareholders. Further, if you’re considering an S-Corp for your business, make sure to check the state laws to determine whether it’s right for your business.
Another advantage of an S-Corp is that the owner of the business is not responsible for paying taxes on the profits of the company. S-Corp taxation is also more complex for those who earn salaries and dividends. As long as you are paid a fair salary, you won’t have to pay corporate taxes. If you’re planning to hire employees to manage the business, you should consider an S-Corp.
How to set up an S-Corporation
If you want to start a business in the United States, you may have been wondering about the S-Corporation. S-Corporations are corporations that are taxed differently than regular businesses. S-Corporations cannot issue stock to more than 100 shareholders, and they can only offer common stock with voting rights.
In addition, they cannot issue preferred stock with dividend priority. As a result, choosing an S-Corporation is not as simple as registering with the IRS. To set up an S corporation, you must file IRS Form 2553 and state tax division form.
As with any type of business, there are many trade-offs to consider. When choosing between a C-corporation and an S-Corporation, be sure to consider both advantages and disadvantages.
While a C-corporation has more flexibility, it also carries higher tax liability through double taxation. On the other hand, an S-Corporation’s limited liability protections allow it to pay a reasonable salary and distribute profits to shareholders without payroll taxes.
While there are definite advantages to an S-Corporation, a small business owner should consult a tax professional before jumping into the S-corporation process. S-Corporations are tax-favored because their profits and liabilities are pass-through to the shareholders’ personal tax returns.
The benefits of setting up an S-Corporation are clear: an S-Corporation can reduce your business’s liability by up to 45%, and you can even receive a deduction for your business expenses.