How Does the IRS Tax S Corporations?
Updated: Nov 9, 2020
An S Corporation is a limited partnership, limited liability company or corporation created through an IRS tax election. S Corporations are so named because the Internal Revenue Service taxes them under Subchapter S of the Internal Revenue Code. Many business owners are surprised to learn that an S Corporation does not actually have to be […]
An S Corporation is a limited partnership, limited liability company or corporation created through an IRS tax election. S Corporations are so named because the Internal Revenue Service taxes them under Subchapter S of the Internal Revenue Code.
Many business owners are surprised to learn that an S Corporation does not actually have to be a “corporation;” rather, it must meet certain conditions to be eligible for a subchapter S election.
There are several potential advantages and disadvantages of electing Subchapter S. The best way to determine if this is a smart decision for your company is to consult a business lawyer.
The corporate attorneys at Solomon Richman P.C. will help you avoid legal issues while minimizing your tax liability. We have been serving businesses in New York for more than 55 years.
Call 516-437-6443 today to arrange a free initial consultation with a corporate attorney in Long Island. You can also learn more about business taxes by visiting http://tax-lawyers.usattorneys.com/new-york/.
Here are the answers to three FAQs about S Corporations:
1.How Does the IRS Tax S Corporations?
As previously stated, the IRS taxes S Corporations under the Subchapter S rules of the Internal Revenue Code. S Corporations are pass-through tax entities. As Biz Filings explains, this means that S Corporations do not have to pay corporate tax; instead, the business owner reports losses and profits on his or her personal income tax return.
Some S Corporations have several shareholders. In this case, each shareholder pays taxes based on his or her ownership share of the S Corp. For instance, if the S Corporation makes $80,000 in profit and four shareholders each own 25 percent of the S Corp, then each shareholder would be taxed on his or her $20,000 income from the S Corporation.
2.Does Electing Subchapter S Improve the Liability Protection of an LLC?
No. It is important to remember that the primary reason for incorporating your business as an S Corp is to reduce tax liability. A Limited Liability Company can be an S Corp, but the S Corp classification does not provide enhanced liability protection.
3. When Is It a Bad Idea to Elect Subchapter S?
One primary reason why business owners elect Subchapter S is to lower their payroll taxes. However, S Corporations Explained outlines a few scenarios when electing Subchapter S does not reduce tax liability:
When a C Corporation has significant operating loss deductions to carry forward;
When shareholders owe out-of-state, non-resident income tax but live in a no-tax or low-tax state; or
When the S Corporation earns less than the shareholders.
If you would like to find out if electing Subchapter S would be a wise decision for your business, contact Solomon Richman P.C. Call 516-437-6443 to schedule a free initial consultation with a Long Island business lawyer.