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What is an S Corp election?

Here’s what you need to know if you choose to have your corporation taxed by the IRS as an S. corporation or S corporation. If you organize your business as a corporation, you can choose how the Internal Revenue Service (IRS) will tax your business. It can be taxed as a C corporation (or C corporation) or an S corporation (or S corporation).

What is an S Corporation?

An S corporation is a corporation that is taxed like a sole proprietorship (if there is only one shareholder) or a partnership (if there are two or more shareholders). The company itself does not pay any taxes, but profits are passed on to shareholders. Shareholders then report income on their personal income tax returns. Not all companies can apply for an S corp. condition. For example, a company cannot have more than 100 shareholders and must be a closely held company.

Why is it called an “S” corporation?

The provisions of the IRS regulations covering this method of taxation are sub sectioning S of Chapter 1 of the Internal Revenue Code. Companies that use the Subchapter S method are often referred to as “S corporations,” “S corp.,” or “Sub S corp.”

What are the benefits of choosing S Corp status?

The benefit of choosing an S corp status is to avoid what is commonly referred to as “double taxation”. C corporations are required to file Form 1120; U.S. Corporate Income Tax Return. Any profit will be taxed on the company price.  If any portion of these profits is passed on to shareholders as dividends, each shareholder is required to report his share on his individual Form 1040, along with Schedule B, Interest, and Ordinary Dividends. So profits are taxed once to the company and again if any profits (dividends) are distributed to shareholders. This is called “double taxation”.

S corporations are required to file Form 1120S, the U.S. Income Tax Return, for the S corporation. Unlike a C corp., any profits reported on Form 1120S are not subject to corporate tax. Instead, profits are distributed among shareholders based on the number of shares each shareholder holds. Each shareholder is then required to report his or her share of profits on his or her personal Form 1040, along with Schedule K-1 (Form 1120S), shareholder’s share of income, deductions, credits, etc. However, profits go to even if no dividends are distributed to shareholders.

How do you conduct an S Corp. election?

If you want to have an S Corp Late Election, you will need to file IRS Form 2553, Election by Small Business Corporation. If you file Form 2553, you do not need to file Form 8832, Entity Classification Election, as C corporations do. You can file Form 2553 with the IRS online, by fax, or by mail. For more details on S corporations and conducting elections,

How long will it take for you to have an S Corp election?

An S corporation may elect by filing Form 2553 S Corp Election  within two months and 15 days of the beginning of the corporation’s tax year. As stated in the Instructions for Form 2553, the two-month period begins on the day of the month in which the tax year begins and ends on the day beginning on the day corresponding to the number of the second calendar month following that month. If there is no corresponding date, the closing price on the last day of the calendar month applies. If you currently have C Corp. and the importance of transition to S corp. for the next tax year, you can also file at any time within the current tax year.

Making a Decision

Making an S corp. election is a fairly straightforward affair. However, deciding whether to hold an election requires consideration of several factors, including the amount of expected profits, whether to distribute dividends to shareholders, whether you have employees, the benefits provided to employees, and how your state will tax the corporation.

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