Nobody said that taxes were easy. This is especially the case when considering whether to be taxed as an S-Corporation. If you go down this road, learning how to fill out form 2553 is critical.
S-corporations are an increasingly popular structure for companies that operate in the United States. They are more complex than other types of companies and require additional tax filing and reporting requirements. If you’re looking for ways to save money on taxes and avoid paying excessive fees, consider an S-corporation.
In this article, we will examine the details of Form 2553 and note some tips and tricks. We will try to make it as simple as follow. Let’s dive in!
Table of contents
Why have an S-corporation?
S-corporation profits are generally distributed to shareholders in proportion to the shareholdings. Shareholders can’t deduct corporate losses in excess of the “basis” of the shareholders’ corporate stock, which is the amount each shareholder invests.
The only exception to this rule is that an S corporation can’t deduct the cost of employee-shareholder fringe benefits. It’s important to note that S-corporation status is temporary, however. The tax benefits of this structure are only applicable to companies that have been operating for a certain period of time.
Another advantage of an S-corporation is that it avoids double taxation. S-corporations must pay owners a going-rate salary in order to avoid both income tax and self-employment tax.
However, they can make distributions to owners without paying taxes. S-corporations also do not have to meet all of the requirements of an S-corporation to stay on their tax-exempt status.
A Word About C-Corporation Taxation
Whether you want to form a C-Corporation or not, there are many advantages to this type of business structure. C-Corporations can provide tax-free fringe benefits to employees, such as health insurance and pension contributions. These benefits are not taxed to shareholders, and all of these expenses are considered deductible.
A C corporation must treat its employees fairly, however. These taxes are different from personal income taxes because a corporation is considered separate from its owners and employees. The rate is usually higher for a C corporation, but the Tax Cuts and Jobs Act of 2017 drastically lowered this tax rate to 21%.
Another benefit of operating as a C-Corporation is that you won’t be liable for paying taxes twice. The profits of a C-Corporation are taxed once, and then distributed to shareholders. Shareholders pay income tax only on the money that’s actually distributed to them.
A C-Corp can also be an LLC taxed as a C-Corp. This type of business also has the largest number of tax deductions. C-Corporations can transfer ownership more easily than LLCs, and can qualify for reduced capital gains taxes for QSBSs.
Dividends can be paid in cash, property, or shares. The board of directors of a C-Corporation determines the amount of dividends, and it can choose to make distributions in cash or property.
A C-Corporation must also pay corporate taxes, but dividends can be taxed twice, meaning that your profits can double as dividends! This is why C-Corporations are so important for entrepreneurs.
How to Fill Out Form 2553
If you are a new business owner, you may be wondering, “How to Fill Out Form 2553?” This article will help you understand the requirements for completing this form. Once you understand the process, you will be ready to file your first taxes.
To file an S corporation return, your business must first obtain an EIN. You must apply for an EIN within two months of your business’s beginning date.
All shareholders must be listed, including former stockholders, who have held shares of the company during the period between line E and the date you file the return. A single-member LLC must have shareholders consent before they can file a Form 2553.
There are two steps to filing a form. First, you must identify the owners of the business. You will need their names and social security numbers. You can also list their EINs.
What about your legal structure?
The first step is to determine whether the company you are starting is a sole proprietorship, LLC, or corporation. If the business is an S-corporation, you must file its application by March 15.
The deadline for calendar-year businesses is March 15, but you can file for an extension by calling the IRS. If you want to file your forms early, you will need to attach a letter explaining why the application was filed late.
After you have determined that your business qualifies, you will need to fill out the Form 2553. If you choose to file for an extension, you must make sure to meet the filing requirements within two months of the effective date.
If you are unable to meet these deadlines, you can still file your forms and obtain a tax status. Most companies choose a calendar year and file their return around March 15 of that year.
Another step in forming an S-corporation is to determine who owns shares. Form 2553 must specify the number of shareholders for each shareholder. Each shareholder will be listed on the form, along with their Social Security number, EIN, and tax year.
For example, if two people own a partnership, both would be listed on the form, but the person with a larger share would have a higher percentage of the company’s shares. It is important to determine who owns shares before completing this form, since it will affect how much dividends you can claim.
Bottom Line
Hopefully, you have weighted the pros and cons of setting up an S-Corp. If you are ready to move forward, then completing Form 2553 is your next step.
Carefully review your decision with your CPA. But it might be a great decision for you and your business!