Instructions For Form 2553 - Payroll Processing Plus printable pdf download

Department of the Treasury

Instructions for Form 2553

Internal Revenue Service

(Rev. December 2002)

Election by a Small Business Corporation

Section references are to the Internal Revenue Code unless otherwise noted.

b. An insurance company subject to tax under the

General Instructions

rules of subchapter L of the Code,

c. A corporation that has elected to be treated as a

Purpose

possessions corporation under section 936, or

To elect to be an S corporation, a corporation must file

d. A domestic international sales corporation (DISC) or

Form 2553. The election permits the income of the S

former DISC.

corporation to be taxed to the shareholders of the

7. It has a permitted tax year as required by section

corporation rather than to the corporation itself, except as

1378 or makes a section 444 election to have a tax year

noted below under Taxes an S Corporation May Owe.

other than a permitted tax year. Section 1378 defines a

permitted tax year as a tax year ending December 31, or

Who May Elect

any other tax year for which the corporation establishes a

business purpose to the satisfaction of the IRS. See Part

A corporation may elect to be an S corporation only if it

II for details on requesting a fiscal tax year based on a

meets all of the following tests:

business purpose or on making a section 444 election.

1. It is a domestic corporation.

8. Each shareholder consents as explained in the

instructions for column K.

Note: A limited liability company (LLC) must file Form

8832, Entity Classification Election, to elect to be treated

See sections 1361, 1362, and 1378 for additional

as an association taxable as a corporation in order to

information on the above tests.

elect to be an S corporation.

A parent S corporation can elect to treat an eligible

2. It has no more than 75 shareholders. A husband

wholly-owned subsidiary as a qualified subchapter S

and wife (and their estates) are treated as one

subsidiary (QSub). If the election is made, the assets,

shareholder for this requirement. All other persons are

liabilities, and items of income, deduction, and credit of

treated as separate shareholders.

the QSub are treated as those of the parent. To make the

3. Its only shareholders are individuals, estates,

election, get Form 8869, Qualified Subchapter S

exempt organizations described in section 401(a) or

Subsidiary Election. If the QSub election was not timely

501(c)(3), or certain trusts described in section

filed, the corporation may be entitled to relief under Rev.

1361(c)(2)(A). See the instructions for Part III regarding

Proc. 98-55.

qualified subchapter S trusts (QSSTs).

Taxes an S Corporation May Owe

A trustee of a trust wanting to make an election under

section 1361(e)(3) to be an electing small business trust

An S corporation may owe income tax in the following

(ESBT) should see Notice 97-12, 1997-1 C.B. 385.

instances:

However, in general, for tax years beginning after May

1. If, at the end of any tax year, the corporation had

13, 2002, Notice 97-12 is superseded by Regulations

accumulated earnings and profits, and its passive

section 1.1361-1(c)(1). Also see Rev. Proc. 98-23,

investment income under section 1362(d)(3) is more than

1998-1 C.B. 662, for guidance on how to convert a QSST

25% of its gross receipts, the corporation may owe tax on

to an ESBT. However, in general, for tax years beginning

its excess net passive income.

after May 13, 2002, Rev. Proc. 98-23 is superseded by

2. A corporation with net recognized built-in gain (as

Regulations section 1.1361-1(j)(12). If there was an

defined in section 1374(d)(2)) may owe tax on its built-in

inadvertent failure to timely file an ESBT election, see the

gains.

relief provisions under Rev. Proc. 98-55, 1998-2 C.B.

3. A corporation that claimed investment credit before

643.

its first year as an S corporation will be liable for any

4. It has no nonresident alien shareholders.

investment credit recapture tax.

5. It has only one class of stock (disregarding

4. A corporation that used the LIFO inventory method

differences in voting rights). Generally, a corporation is

for the year immediately preceding its first year as an S

treated as having only one class of stock if all

corporation may owe an additional tax due to LIFO

outstanding shares of the corporation’s stock confer

recapture. The tax is paid in four equal installments, the

first of which must be paid by the due date (not including

identical rights to distribution and liquidation proceeds.

extensions) of the corporation’s income tax return for its

See Regulations section 1.1361-1(l) for details.

last tax year as a C corporation.

6. It is not one of the following ineligible corporations:

a. A bank or thrift institution that uses the reserve

For more details on these taxes, see the Instructions

method of accounting for bad debts under section 585,

for Form 1120S.

Cat. No. 49978N

Instructions For Form 2553 - Payroll Processing Plus

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