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Guidance for Special Types of BusinessesSpecial Rules for Certain Business StructuresSpecial Provisions for S-CorporationsAn S corporation is a corporation that makes a special election with the IRS to be taxed under the rules of Subchapter S of the Internal Revenue Code. To elect to be an S corporation, a corporation must file Form 2553, Election by a Small Business Corporation. A corporation must meet certain qualifications to be granted an S election. The only benefit of being an S corporation is tax related. An S corporation is just a regular corporation under state law that has special rules under federal tax law. Some states follow the special federal tax rules for S corps for state income tax purposes and some do not. Each of the shareholders must consent to the election. Once the election is accepted, all income, losses, deductions and credits generated by an S corporation are passed through to the corporate shareholders and the shareholders report the items on their personal income tax returns. If the S corporation is profitable, the income will be reported on the shareholder's personal return and the shareholder will have to pay the tax on the income, but the S corporation pays no tax on the income. Distribution from an S corporation may be tax-free to the shareholder if income was previously recognized. Losses of an S corporation can be deducted on the shareholder's personal return to offset other income of the shareholder. Note: Shareholder may have losses limited by basis, at-risk, or passive activity rules. (Separately stated deductions may also be subject to individual limits i.e. contributions.) The shareholder’s “basis” is the amount of money a shareholder put into the business, plus/minus the amount he has previously reported as income/loss, less non-taxable distributions from the business. In certain situations an S corporation is subject to an entity level tax. Entity level taxes on S corporations may include:
Note: An S corporation will never be subject to an entity level tax unless the S corporation was once a C corporation. An officer/shareholder who provides services to the S corporation must be paid a reasonable salary instead of just receiving tax-free distributions from the S corporation. The S corporation files and is responsible for employment taxes. An S corporation files its return on Form 1120S. For more information including specific requirements on S corporations, see the Instructions for Form 1120S.
Form
1120S U. S.
Income Tax Return for an S Corporation Web Link |