Business Entities According to the IRS: S Corporations
As promised in our last blog, today we will focus on s-corporations. We’ll discuss what an s-corporation is, the federal tax rate for an s-corporation, and who benefits the most from filing as a s-corporation.
An s-corporation, sometimes called an s-corp, is a special type of corporation that's designed to avoid the double taxation drawback of regular c-corps. S-corps allow profits, and some losses, to be passed through directly to owners' personal income without ever being subject to corporate tax rates.
Not all states tax s-corps equally, but most recognize them the same way the federal government does and tax the shareholders accordingly. Some states tax s-corps on profits above a specified limit and other states don't recognize the s-corp election at all, simply treating the business as a c-corp.
In 2020, s-corporations will be taxed at the same rate as the individual. For example, Matthew and Sarah each own 50% of stock in a company. The way the s-corp would be taxed is 50% of the s-corp’s profit/losses would flow to each individual at their individual tax rate, this is the major difference between the c-corp and s-corp.
Not just any corporation can become an s-corp. The IRS requires a corporation to: 1) be domestic in the US, 2) have only allowable shareholders (partnerships, other corporations, etc. cannot be s-corp shareholders), 3) have no more than 100 shares of shareholders, 4) have only one class of stock, and 5) not be an ineligible corporation. If you have any other questions about whether filing as an s-corporation is right for you, the professionals at The Center for Financial, Legal and Tax Planning are more than well-equipped to answer your questions. Please contact us at (618) 997-3436.