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[S1]S Corporation Tax Software

by Nick Braun Ea Phd, Nic

S corps don't pay federal corporate income tax but they do have to file a tax return ? Form 1120S reporting the profits or loss of the business. K-1 forms are then given to the shareholders who report the figures on their individual tax returns.

Salaries and bonuses paid by your S-corp are subject to income tax and self-employment tax but dividends are only subject to income tax ? there is no self-employment tax.

State Taxation
?Most states tax s-corps the same as the Federal Government does.
?The shareholders are subject to state income taxes on their share of the profits.
?Some states require you to make an extra S-corporation election.
?Some states do not recognize s-corporations and treat s-corporations like c-corporations.

Your s-corporation will still be an s-corporation for federal tax purposes but not for state tax purposes. This means you will have to file a state tax return.
Some states such as California, New York and New Jersey tax both the s-corporation and the shareholders ? a form of double taxation. However, the corporate tax rates are usually modest.
If you want to set up an s-corporation contact your state income tax office and ask them whether a separate state s corporation election is required and how s-corporations are taxed.

Losses
Like an LLC, S-corporation losses flow through to the individual shareholders and can offset your other income. However, you cannot deduct a loss greater than your stock basis.
Your stock basis is generally the total money and property you put into the business.

To qualify for S-Corp status:
?No more than 75 shareholders are allowed. Venture capitalist are often put off by this sort of set up.
?Non US citizens are not allowed to be shareholders
?Individuals, certain partnerships and other S Corporations can be shareholders but S Corporations cannot be owned by C Corporations, other S corps, many trusts, LLCs and partnerships.
?S Corporations can only issue one class of stock - common stock. Your ownership percentage determines your percentage of the pass through income. This is different to LLCs where the percentage of pass through income does not have to be the same as ownership percentage.
?Your interest is freely transferable, which means you can sell it without the approval of other shareholders. LLC members need approval from the other members.
?Your ownership interest is easy to sell or transfer to family members. This can be time consuming and costly for a sole proprietor or partnership. With corporations your ownership of all the business assets is wrapped up in the stock you hold and all you have to do is sign over your stock.
?The corporate structure allows you to easily sell shares in the company through stock offerings. This is useful for attracting investors and employees.

Although the term Subchapter S Corporation sounds as if it applies to a certain type of company, in actuality, it is merely a term used by the IRS (Internal Revenue Service) to designate a particular tax status. Almost any company that is comprised of 75 or less shareholders can apply for the Subchapter S Corporation tax status designation. Being approved for a Subchapter S Corporation status allows the company to be taxed as if it were a partnership or sole proprietorship. An application is generally submitted just after a company has incorporated. At any time a company may choose to withdraw from Subchapter S Corporation tax status by filing another form with the IRS. Withdrawals must be submitted prior to the beginning of a new tax year.

Subchapter S Corporation Eligibility Requirements

In order for a business to qualify as an S Corporation, there are several eligibility requirements that need to be met. Any corporation that meets the following criteria can be approved for Subchapter S Corporation status:

* The company must have 75 or fewer shareholders, and each shareholder must agree to file as an S Corporation.
* Every stockholder must be a resident and citizen of the United States
* Stock sold by the company must be of a single class
* The company is required to use the calendar year as the official fiscal year

If a corporation meets these requirements, they must file form 2553 with the IRS to be granted Subchapter S Corporation tax status.

Advantages to Subchapter S Corporation Status

This tax status is appealing to many business owners for several reasons. The primary advantage to filing as an S Corporation is that income is passed through directly to the shareholders who file corporate income with their personal taxes. In this manner, the corporation avoids being taxed twice for the same income. In most cases, S Corporations do not pay any income tax and losses are absorbed by the shareholders instead of the corporation. Additional advantages to Subchapter S Corporation tax status includes:

* Return on investment earnings do not fall under self-employment tax status providing the shareholder/employee receives reasonable compensation for their work.

* Financial documentation and accounting is less complicated than that required by traditional corporations.

* S Corporation status may provide easier access to credit resources, depending on the business history of the corporation.

Disadvantages to Subchapter S Corporation Status

When considering whether or not to file for Subchapter S Corporation tax status, companies should also be aware of potential disadvantages. Because the financial power is in the hands of the shareholders, executive decisions need to be agreed upon by all. Disagreements between individual shareholders can lead to a stall in the process. Additionally, stockholder/employees must declare health insurance and other employee benefits as taxable income if they own more than a 2% share of stock. Subchapter S Corporation tax status is most beneficial to corporations with small numbers of shareholders that have a common vision for the future of the company.

Article Source : No State Income Tax

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Both Nick Braun Ea Phd & Paolo Basauri are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.

Nick Braun Ea Phd has sinced written about articles on various topics from Finances, Tax and tax. For more in-depth information you may be interested in our guide How to Choose the Most Tax Friendly Business Structure. You'll find more information on