Need Some Deductions for 2011?

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Updated for 2011

Business Structures

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What Is an S-Corporation?

An S-corporation is a pass-through entity.

The purpose of an S-Corporation is to provide shareholders the limited liability protection of a regular C-corporation and the pass-through tax treatment of a partnership.

What is a Pass-Through Entity?

A pass-through entity is a financial conduit from the entity to its owners.

This means:

Income passes through the entity directly to S-corporation stockholders, even if the income is not actually distributed to them (referred to as undistributed earnings).
- The S-corporation itself is not taxed. However, their are a few exceptions where an S-corporation that previously operated as a C-corporation for a length of time can be taxed.
Losses, deductions, and credits are also passed through to stockholders.
S-corporation stockholders include income passed through to them on their individual income tax returns where it is subject to income taxes.
S-corporation stockholders get to deduct S-corporation losses from their other sources of income (e.g., wages from a job, interest, dividends) on their individual income tax return.
It is this pass-through treatment of income that enables S-corporations to avoid double taxation of income. In other words, S-corporation income is taxed only once, at the individual tax level.
Annually, an S-corporation files Form 1120S and sends Schedule K-1 to each shareholder detailing his/her share of income, deductions, gains, losses, and credits.

Limited Liability

S-corporation shareholders are not personally liable for S-corporation debts.

However, there is a caution here:

Trust fund taxes:
- Limited liability will not shield shareholder/employees from liability for delinquent trust fund taxes or any person with responsibility for the payroll tax withholding.

Trust fund taxes include:

Federal income taxes required to be withheld from an employee's wages, plus
The employee's share of social security and Medicare taxes.

Legal Status of an S-corporation

The "S" in S-corporation refers to the subchapter of the Internal Revenue Code that governs its tax treatment for federal income tax purposes. It doesn't affect how the business is treated for legal purposes.

A C-corporation and a limited liability company (LLC) may elect S-corporation tax treatment by filing Form 2553 with the IRS after the original formation of the business as either a C-corporation or LLC.

In other words, if a business starts out as a C-corporation or LLC, state laws that apply to these business structures still apply even if an election is made to be taxed as an S-corporation.

Tax Year

An S-corporation is generally required to use a calendar year (January 1 through December 31).

IRS approval is needed to adopt a different tax year.

S-corporations: Advantages of an S-corporation; Disadvantages of an S-corporation

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