With tax filing season here and the federal tax code changes in place for over a year, you may have discussed the potential tax advantages of an “S” Corporation election. For some, the pass-through tax treatment and 20 percent deduction on qualified business income might provide significant savings. If you have a business that would benefit from being taxed as an “S” Corp in 2019, now is the time for action! The “S” Corp election filing deadline for existing LLCs and corporations is fast approaching, March 15 is the deadline for all “S” Corp filings.
An “S” Corporation is a corporation for which corporate income, losses, deductions, and credits flow through to its shareholders. To become an “S” Corp, a corporation must file Form 2553 (Election by a Small Business Corporation). The corporation itself doesn’t pay taxes at the corporate rate on its profits. “S” Corporations avoid “double taxation”—i.e., when a corporation’s profits are taxed at the corporate rate, and then some of those profits (those issued as shareholder distributions) are taxed again on shareholders’ personal tax returns.
Corporations that want “S” Corp taxation must meet certain eligibility criteria. Among the requirements are:
- Must be a domestic corporation (and not one that is ineligible such as certain financial institutions, insurance companies, and domestic international sales organizations)
- May not have more than 100 shareholders
- May not have shareholders that are non-resident aliens, partnerships, or corporations
- May only have one class of stock
LLC owners might find that choosing “S” Corp tax treatment will lower their self-employment tax burden.
LLCs that meet the same above requirements regarding the number and type of owners can be taxed as an”S” Corp while remaining organized as an LLC.
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