What is an S Corp?
An S Corp is a special type of corporation that elects to pass its income, losses, deductions, and credits directly to shareholders, avoiding the double taxation that hits regular C Corporations. Essentially, it’s a “pass-through” entity under IRS Subchapter S, meaning profits flow to your personal tax return like a partnership or Sole Proprietorship, but with corporate protections. I discuss S Corps and their comparison to normal corporations in this video.
To qualify, your business must be domestic, have no more than 100 shareholders (all U.S. citizens or residents), issue only one class of stock, and not be in certain ineligible industries like insurance or banking. It’s great for small to mid-sized businesses looking for liability protection without corporate double taxation.
S Corps are passthrough entities. This means the profit “Passes through” to the individual shareholder/member and is taxed at their individual marginal tax rate on the 1040 (Individual Tax Return). S Corps are only taxed once, unlike C Corps, whom are taxed at the Corporate Level and Shareholder Level.
The Tax Return associated with an S Corp is the 1120-S. There will be one 1120-S per business entity. Each member/shareholder of the S Corp will receive a K-1 corresponding to their ownership percentage based off the companies articles of organization, bylaws, or operating agreement.
The K-1 will may include the following income types, based on how the business/shareholders earn money:
Ordinary business income (or loss) — From the entity’s trade or business operations (often the largest item; reported on Schedule E).
Net rental real estate income (or loss) — From real estate rentals (typically passive).
Other rental income (or loss) — From non-real estate rentals (also passive).
Interest income — Taxable interest (reported on Schedule B).
Dividend income — Ordinary and qualified dividends (reported on Schedule B; qualified may get preferential rates).
Royalty income — From intellectual property or natural resources.
Capital gains (or losses) — Short-term and long-term (reported on Schedule D); may include special rates (e.g., 28% rate gain or unrecaptured Section 1250 gain).
Other portfolio income — Annuities or non-business income
Below is an example of a K-1 and here is the link to the 2025 IRS/Treasury Draft K-1
Some benefits of S Corps:
1) Tax Savings on Self-Employment Taxes: As a sole prop, you pay self-employment tax on every dollar of profit. In an S Corp, you pay yourself a reasonable salary (subject to payroll taxes), but the rest can come as distributions—free from self-employment tax. This can save thousands once your net income hits $60,000–$80,000.
2) Qualified Business Income (QBI) Deduction: Up to 20% off your qualified income—huge for reducing taxable profits. Available to S Corps, but phase-outs apply (more below). Downsides: More paperwork (Form 2553 election, annual filings), payroll setup, and potential costs to maintain.
Major downside of an S Corp are the additional fees such as payroll costs, payroll set up, professional services and compliance costs.
But for profitable businesses, the tax wins usually outweigh this.
How to become an S-Corp? Must complete form 2553.
Form 2553: Election by a Small Business Corporation - Draft of Form 2553
Form 2553 is the IRS form used by eligible domestic corporations (or entities electing to be treated as corporations, such as certain LLCs) to elect S corporation status under Internal Revenue Code Section 1362(a). This allows the business to be taxed as a pass-through entity, where income, losses, deductions, and credits flow through to shareholders’ personal tax returns (avoiding double taxation at the corporate level). Once elected, the entity files Form 1120-S annually and issues Schedule K-1s to shareholders.
To qualify for S corporation status, the entity must meet these IRS criteria:
Be a domestic (U.S.) corporation or an eligible entity treated as one.
Have no more than 100 shareholders (family members can be treated as one shareholder in some cases).
Shareholders must be allowable types: U.S. citizens/residents, estates, certain trusts (e.g., QSST or ESBT), or exempt organizations—no partnerships, corporations, or non-resident aliens.
Have only one class of stock (no preferred stock with different rights).
Not be an ineligible corporation (e.g., certain banks, insurance companies, or international sales corporations).
See below for the first two pages in Form 2253.
LLCs can elect S Corp status by filing Form 2553 (it may deem an entity classification election as well).Filing Deadlines (as of January 2026)
To be effective for the current tax year (e.g., starting January 1, 2026, for calendar-year entities): File no later than 2 months and 15 days after the tax year begins—typically March 15 or 16, 2026 (March 15, 2026, is a Sunday, so likely the next business day, Monday, March 16).
You can file anytime during the prior year (all of 2025) for it to take effect January 1, 2026.
For new entities: File within 75 days of incorporation/formation or the start of business (whichever is first) for retroactive effect.
Late filings: Relief may be available under Rev. Proc. 2013-30 (within ~3 years + 75 days) if reasonable cause is shown and the entity acted as an S Corp consistently.
How to File
Download the current Form 2553 and instructions from irs.gov.
Complete key sections:
Part I: Entity info (name, EIN, address, incorporation date, effective date).
Shareholder consent statements (all must sign).
Officer signature.
If applicable: Late election explanation or special elections (e.g., QSST for trusts).
File by mail or fax (no e-filing) to the IRS service center based on your location (see instructions for addresses/fax numbers).
The IRS typically sends an acceptance letter (CP261 notice) or rejection.
Late S Corporation Election Filing (Form 2553)
If you miss the deadline for filing Form 2553 (typically March 15 or 16 for calendar-year entities wanting S Corp status starting January 1), the election normally takes effect the following tax year. However, the IRS provides automatic relief for late elections under Revenue Procedure 2013-30 (still in effect as of January 2026), allowing retroactive (backdated) treatment if specific conditions are met.Key Requirements for Late Relief (Rev. Proc. 2013-30)To qualify:
The entity must be eligible to be an S corporation (e.g., ≤100 shareholders, one class of stock, allowable shareholders).
The failure to qualify as an S Corp was solely due to not filing Form 2553 timely.
The entity intended to be an S Corp from the desired effective date.
There is reasonable cause for the late filing (e.g., lack of awareness, reliance on a tax professional; the IRS is often lenient).
The entity and shareholders have filed all tax returns (e.g., Form 1120-S if applicable, or personal returns) consistent with S Corp status for the intended year and all subsequent years.
The request is filed within 3 years and 75 days after the intended effective date (e.g., for a January 1, 2026 effective date, file by mid-March 2029).
How to File a Late Election
Complete Form 2553 as usual, entering the desired effective date (e.g., January 1, 2026) on Line E.
At the top margin of Page 1, write: “FILED PURSUANT TO REV. PROC. 2013-30”.
Provide a reasonable cause statement:
On Line I (Part I), or
Attach a separate statement explaining the delay and diligent correction upon discovery.
If attaching to a Form 1120-S: Write “INCLUDES LATE ELECTION(S) FILED PURSUANT TO REV. PROC. 2013-30” at the top of the 1120-S.
File by mail or fax (not e-file) to the appropriate IRS service center (addresses/fax in Form 2553 instructions).
All shareholders must consent (signatures on Form 2553).
The IRS typically processes and sends an acceptance letter (or rejection) within months.
