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Feb 2020

What is an S Corporation (S Corp)?

A corporation has a board of directors who make high-level decisions about running the business. Shareholders are responsible for electing directors to the board. What is an S Corporation (S Corp)? Officer roles like president, vice president, and treasurer also exist to manage daily business operations outside the responsibilities of the board of directors.

How often do S corps pay taxes?

Shareholder-employees filing their taxes quarterly generally use IRS Form 941, Employer's Quarterly Federal Tax Return to report the income taxes and FICA taxes withheld from their salary, as well as the portion of payroll taxes paid by the S corporation.

Those who work as employees typically pay half as much in payroll taxes , because the employer pays the other half. But a self-employed individual has to pay the full amount.


There are a number of essential protocols for properly operating as an S corp. The business must hold regularly scheduled meetings of directors and shareholders. Minutes of those meetings must be recorded in exacting detail. And all of these protocols are formalized in corporate bylaws, which also dictate procedures for maintaining records. No more than two and a half months (two months, 15 days; 75 days total) after the beginning of the tax year the election is to take effect. For new entities, the tax year begins the date the business starts operations, acquires assets, or issues shares, whichever is earliest.

What is an S Corporation (S Corp)?

It can sometimes be more beneficial to form a brand new C Corporation rather than converting. Generally speaking, C Corporations offer more flexibility than S Corporations and are therefore the best choice for large companies with a large numbers of shareholders, especially if they are publicly traded. Shares do not include regulated investment corporations and real estate investment trusts . Availability of Refund Transfer funds varies by state.

The S Corporation Built-In Gains Tax: Commonly Encountered Issues

Software DE, HI, LA, ND and VT do not support part-year or nonresident forms. Receive 20% off next year’s tax preparation if we fail to provide any of the 4 benefits included in our “No Surprise Guarantee” (Upfront Transparent Pricing, Transparent Process, Free Audit Assistance, and Free Midyear Tax Check-In). Description of benefits and details at H&R Block tax software and online prices are ultimately determined at the time of print or e-file. Small business taxes can be overwhelming as an entrepreneur.

It is created through election to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code. The tax status does not change the operations of the business, but it means that the corporation will not pay federal income tax; rather, the tax burden will be passed on to shareholders. You can get the benefits of limited liability and pass-through taxation (including the pass-through tax deduction) by creating a limited liability company . Because an LLC offers its owners the significant advantage of greater flexibility in allocating profits and losses, and because LLCs aren’t subject to the many restrictions of S corporations, forming an LLC can be a better choice. However, in some cases an S corporation’s shareholders’ may qualify for the pass-through deduction while an LLC’s owners with the same amount of income may not. The upshot of being an S corporation is that shareholders are able to avoid the double taxation on corporate income. Further, being classified as an S corporation allows the business entity to “pass-through” their business income, losses, deductions, and credits to shareholders for tax purposes, who pay taxes at ordinary income rates.

Pass-Through Tax Treatment Of S Corporations

Although these fees usually are not expensive and can be deducted as a cost of doing business, they are expenses that a sole proprietor or general partnership will not incur. A corporation is a business entity that you form by filing incorporation documents with your state. Corporations differ from sole proprietorships, partnerships or LLCs in a variety of ways. A corporation has shareholders, directors and officers. The shareholders own stock in the company, the directors set policies and oversee the “big picture,” and the officers run the company day-to-day. In a small business, one person may serve in multiple roles. Both S corps and LLCs are pass-through entities, meaning that they don’t pay corporate taxes, and both offer limited liability protection for their owners/principals.

S corporations also benefit from Pennsylvania’s flat personal income tax of 3.07% instead of the high corporation tax rate of 9.99%. This Built In Gain tax rate is 35% on the appreciated property, but is only realized if the BIG property is sold within 10 years (starting from the first day of the first tax year of conversion to S-Corp status). The American Recovery and Reinvestment Act of 2009 reduced that 10-year recognition period to seven years . The Small Business Jobs Act of 2010 further reduced the recognition period to five years. However, only single-member LLCs can own a stake in an s corp. One of the tax advantages of an s corp is similar to that of an LLC in that both can pass their profits and losses through to their personal income tax report each year. Most states require s corps to file annual reports and pay franchise taxes to maintain their good standing.

U.S. Income Tax Return for an S Corporation

Pass-through taxation means that your company isn’t taxed on the income it generates. Instead, this income can be distributed to the owner/shareholder. When it comes to owners in particular, a key distinction is that with a partnership, any/all income allocable to an active partner in the business is automatically and fully treated as self-employment income, subject to FICA self-employment taxes . After filing their Articles of Incorporation, shareholders must file Form 2553 with the Internal Revenue Service for the election of Subchapter S status. 1 Two immediate consequences may result from an election, but only if the corporation uses the last-in, first-out method of accounting for its inventories or has an overall foreign loss. Under Sec. 1363, a LIFO recapture tax is imposed in the last year of its C corporation status, and the resulting tax is paid in equal installments over a period of four tax years beginning with the final C corporation year. Under Sec. 1373, an overall foreign loss generally must be recaptured.

What is an S Corporation (S Corp)?