Get The Complete Rundown on S-Corporations and Taxes

What is an S Corporation?

When you’re a business owner, you can elect to have your entity be classified as an S corporation for federal tax purposes using Form 2553. An S corporation is a pass-through entity, which means your business does not pay income tax at a corporate level. Instead, you and your shareholders are taxed at an individual level. Income and losses are reported on personal tax returns, which helps avoid double taxation. That’s what the C corporation experience is all about.

Protection from liability is an advantage of forming an S corporation. Your business’ assets are separate from your personal assets. If your company happens to be in legal or debt trouble, your personal assets will be fully safeguarded.

The key advantage for forming an S corporation is the considerable savings from self-employment taxes.

S corporations have many more rules and regulations than other entities. If you are an S corporation, you are obligated to hold annual shareholders meetings and keep detailed documents regarding the meetings’ subject matter, which are known as recorded minutes.

What Types of Businesses Qualify to be S Corporations?

Your business must meet the following requirements to be classified as a S corporation:

• Your business must be a domestic entity.
• Shareholders cannot be partnerships, other corporations, or nonresident aliens. They may be individuals, estates, and trusts.
• Your business cannot have more than 100 shareholders.
• Your business can only have one class of stock.
• Certain types of insurance companies, financial institutions and domestic international sales corporations are ineligible.

Taxes for S Corporations.

Unlike C corporations, S corporations have once-a-year filing requirements rather than quarterly filings. To prepare for an S corporation’s annual tax return, you must use Form 1120S to report the income, gains, losses, deductions, and credits of your business.

Here are some of the documents and information you need to successfully file your return:

• S Election Effective Date: This is the date your business was elected as a S corporation. This will most likely be January 1 in whichever year you made the election.
• Business Activity Code: This six-digit code designates the industry your business is in. Find your code now.
• Product/Service: This is the product or service that generates most of your revenue.
• Number Of Shareholders: This is the number of shareholders and/or owners in your business.
• Employer Identification Number (EIN): This helps track your business when you file taxes, open a bank account, get a credit card, etc. If you do not have a EIN, you need to apply for one.
• Date Incorporated: If you don’t remember, you can find this in your articles of organization.
• First Year Filling As An S Corporation: If it is, mark yes and attach Form 2553.
• Profit and Loss Statement: This outlines your business’ income and expenses incurred during the tax year. You can use Form 1040 as a reference.
• Balance Sheet Report: This document shows your business’ financial position at the end of the tax year. This includes information about assets, liabilities, and equity. We can help you formulate a balance sheet.
• Accounting method: Your business either uses cash-basis accounting or accrual accounting. Most small businesses use cash-basis accounting, which means revenue is documented when cash is received and expenses are recognized when paid.
• 1099 reporting: Form 1099 is used for independent contractors. If you hired one during the tax year and he or she earned more than $600, you must report this.

Work with the Experts

1-800Accountant is a virtual accounting firm merging the convenience of technology with live support from real professionals, making taxes easy and personable for individuals and small businesses. Focus on growing your bottom line while our team of accountants, certified public accountants, and enrolled agents perform the heavy lifting – tax advisory and preparation, payroll, bookkeeping, and audit defense. For professional, year-round services at an affordable price, get in touch with us and schedule your consultation with America’s leading small business accounting firm.