S Corp Benefits

The  S Corporations rules can be found in the Internal Revenue Code, Chapter 1, Subchapter S.  This Chapter was added to the IRC in 1958. The S Corporation did not become popular until the tax overhaul in  1986. It was in that year that the highest individual rates we reduced to levels lower than the highest corporate tax rates. So let us explore the S Corp benefits.

Eligibility for S Corporation Status

The S Corporation chapter of the IRC was put in place by the recommendation of the US Treasury. Treasury believed that small businesses would be better served with this type of entity. This Chapter had a way of combining the attributes of the sole proprietorship and the C Corporation.

S Corporation Rules

S Corporation rules were enacted prior to the creation of the LLC.  Originally they applied only to the C Corporation.  Today it includes the LLC as well. The S Corporation must fit the following rules in order to qualify.

The S Corporation must be a domestic corporation or LLC.  Only individuals and certain trusts and estates can own stock or hold a membership interest in an S Corporation.  Secondly, the entity must have no more than 100 shareholders or members. Also, the company can have only one class of ownership. Finally, financial institutions and insurance companies are prohibited from becoming S Corporation, under the IRC.

How the S Corporation Works

The structure of the S Corporation for businesses gives the business owner the liability protection it often needs. Additionally for S corp benefits, it allows small businesses to have their profits taxed at their personal tax rate.

An S Corporation with file Form 1120S for tax purposes.  Taxes are not sent with the S Corp tax return.  In fact, the S Corp return does not even calculate income tax liability. And while it is referred to as a tax return, it would be most correctly referred to as an information return.

A summary of Form 1120S is included on the tax return of its shareholders or members. The income tax owed on profits earned by the S Corp is computed on the individual’s return. Any tax owed is remitted to the IRS along with the individual’s personal income tax return.

Why Small Business Like the S Corporation

There are several reasons for small businesses to like the S Corporation. One, it gives them liability protection.  Second, S Corps benefits allows business owners to avoid double taxation which can occur when a business is taxed as a C Corporation. Typically, the most compelling reason why small business owners elect to be taxed as an S Corporation is that it allows for tax-saving opportunities that are not available to sole proprietorships, partnerships, or C Corporations.

Now the bad news. Yes, it could reduce your tax bill.  But obviously, not all companies are the same and not all individuals are the same. The tax benefit of an S Corporation varies for every business and every individual. So before you just elect the S Corporation, you must do the math. Those are the S Corporation basics

Schultz & Associates, CPA, PLC

Schultz CPA is located in Canton, Michigan.  The Firm is a full-service regional accounting firm. Schultz CPA is big enough to have the experience you need, but they are small enough to fit your individual needs. Call 734-354-2380 for more information.