Friday, September 25, 2009

S Corporations

An S corporation or S-corp is a corporation that makes a valid election to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code. S corporations elect to pass corporate income, losses, deductions and credit through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income.

Qualification Requirements
To qualify for S corporation status, the corporation must meet the following requirements:
* Be a domestic corporation,
* Have only allowable shareholders including individuals, certain trust, and estates and may not include partnerships, corporations or non-resident alien shareholders,
* Have no more than 100 shareholders,
* Have one class of stock, and
* Not be an ineligible corporation i.e. certain financial institutions, insurance companies, and domestic international sales corporations.

Filing Requirements
1. For income tax return, S Corporation files Form 1120S and schedule K-1 (Form 1120S),
2. For estimate taxes, it files Form 1120-W (corporation only) and 8109 (for depositing taxes), and
3. For employment taxes it files (a) Form 941 for Social security and Medicare taxes and income tax withholding, (b) Form 940 for federal unemployment (FUTA) tax, and Form 8109 for depositing taxes.

Form 1120S generally must be filed by March 15th of the year immediately following the calendar year covered by the return or, if a fiscal year (a year ending on the last day of a month other than December) is used, by the 15th day of the third month immediately following the last day of the fiscal year, and the automatic extension period is six months. The corporation must complete a Schedule K-1 for each person who was a shareholder at any time during the tax year and file it with the IRS along with Form 1120S. The second copy of the Schedule K-1 must be mailed to the shareholder. For 2008, the amount for late fling is $86/month/shareholder with a maximum of 12 months.

Some but not all states recognize a state tax law equivalent to an S corporation, so that the S corporation in certain states may be treated the same way for state income tax purposes as it is treated for Federal purposes. A state taxing authority may require that a copy of the Form 1120S return be submitted to the state with the state income tax return.

California additional taxes
S-corporations pay a franchise tax of 1.5% of net income in the state of California (minimum $800). This is one factor to be taken into consideration when choosing between a limited liability company and an S-corporation in California. On highly profitable enterprises, the LLC franchise tax fees, which are based on gross revenues (minimum $800), may be lower than the 1.5% net income tax. Conversely, on high gross revenue, low profit-margin businesses, the LLC franchise tax fees may exceed the S corp net income tax.

New York City additional taxes
In New York City, S-corporations are subject to the full corporate income tax at a 8.85% rate. However if the S-corporation can demonstrate that a portion of its business was done outside the city, that portion will not be subject to the additional tax.

More Articles:
Your Filing Status
1. Filing Status for Married
2. Head of Household
Exemptions for Dependents
1. Requirements for claiming a dependent
2. Child of separated or divorced parents
Filing Requirements
1. Filing Requirement for a Dependent
2. 2009 Filing Requirements
Your Income
1. W2 vs 1099-Misc: Employee vs Independent Contractor
2. Tax Filing by Self Employed Sole Proprietor or Independent Contractor 3
. Partnerships
4. Filing W4 Employee’s Withholding Allowance Certificate
5. Missing W2, 1099-Misc, 1099-R, 1099-Int
6. My Tax Refund?
Your Foreign Income
1. U.S. Citizen or Resident with Foreign Income
2. Foreign Bank and Financial Accounts
Income Exemptions and Deductions
1. Moving Expenses
2. Itemized deductions
3. Student Loan Interest Deductions
Income Adjustment
1. Traditional IRA and Roth IRA
2. Elective Deferrals 401(k) Plans
U.S. Gift tax and Inheritance Tax
1. The U.S. Gift Tax
2. Tax on Inheritances
Sale of Your Home
1. Profit from the Sale of Your Home
2. Foreclosure or Repossession of Main Home
3. First-Time Homebuyer Credit
State Tax
1. Working in Two or More States
What's New for 2009
What's New for 2009

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Prashant Jain said...

Since S-Corp has a pass through taxation structure, so is the tax assessed based on where the partners are residing or where the office of the business is? The reason I am asking is we are planning to get the office in Long Island City and we live partners live in Queens County and Long Island

MyTaxes Team said...

S Corp file federal tax return Form 1120S and issues K-1 (Form 1120S) to the share holders. Each share holder will report K-1 income on his/her tax return on schedule E (Form 1040).
For partner's federal return it does not matter where the office of business is. Partner will pay state income tax to the state where he/she resides as well to the state where the partner works.