S corporation status is a form of tax designation that is granted by the IRS. It enables the corporations to pass their income to their investors. S corporations are also referred to a few other names as “Subchapter S corporation,” “S corp, or “Small Business Corporation".
Let us learn more about S corporation status and S Corporation Taxes in this article.
About an S corporation
Internal Revenue Service grants this distinctive tax status as “S corporation” that allows corporations to pass their credits, deductions, and corporate income, via their stakeholders.
Take an S Corp taxes example, S corporations need not pay federal taxes. This tax stays permits them to avoid double taxation, which happens when a business gets taxed at the business owner as well as corporate level.
Savvy & Suite is a reputed S Corp taxes management firm that makes businesses aware of the importance of filing their tax return in the year post-sale to save from big bills.
How are S corps taxed?
As per S Corp taxes 2020, an S corp does not need to pay corporate income taxes. In place of it, the individual investors of the company will divide the losses and income amongst each other and mention it on their tax returns. S corps can avoid business tax by passing their losses/income directly to their business owners.
Also, note that S corp tax is a tax designation and not a type of business entity. So, a business cannot ‘incorporate’ as an S corp without applying to the IRS. S corps state their income on Form the 1120S and pass it to the IRS. To know how to file S Corp taxes, you need to be first incorporated as a regular C corporation.
Alternatively, you need to file for LLC status. It is important to know that S Corps aren’t treated uniformly by each state. Therefore, it is important to refer to the state rules when computing S corporation taxes.
What is the method to obtain S corp tax status?
A company that wants to get S corp tax designation status as a C corp, must submit Form 2553, to the IRS. It has to be duly signed by all the shareholders of the company.
On the other hand, if a company wants to elect S Corp status as a “limited liability company”, then it must file Form 8832, and submit it to the IRS. LLCs are the companies that can be owned by partnerships, corporations, trusts, or other types of LLCs
Drawbacks of becoming an S corporation
Exemption of tax makes it attractive for companies to achieve S corp tax designation but they have a few drawbacks:
• Stringent requirements to meet the IRS’s requirements, failing which the IRS can immediately cancel it and tax in the form of a C corporation. This can lead to massive issues around tax time.
• The IRS keeps closely scrutinizes whether or not the “reasonable” salaries that corporate officers are paying are reasonable.
There are a few corporations that are entitled to get a special tax designation called “S corporation” status. It exempts them from making payments of corporate income taxes. Due to these tax advantages, S corporation status attracts a lot of businesses.