Need Some Deductions for 2011?

Don't overlook these!

Updated for 2011

Business Structures

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Becoming an S-Corporation

When a business is incorporated it starts its life as a C-Corporation. To become an S-Corporation takes an extra step.

The extra step:

File Form 2553, Election by Small Business S-Corporations to Tax Corporate Income Directly to Shareholders.

Instructions to Form 2553.

Steps to Becoming an S-corporation

First, you must complete the incorporation process for your existing business.
- If you originally formed an LLC, simply file Form 2553 to elect S-corporation tax treatment for your LLC. You don't have to file Form
After the incorporation is approved, the corporation will begin its life as a regular C-corporation and will be taxed as such.
Now you're ready to file for S corporation status.
File Form 2553 with the IRS to elect S status.
The IRS will notify the Corporation if its election is accepted and when it will take effect. An IRS determination notice should be received within 60 days after Form 2553 if filed.

Filing Deadline

File Form 2553 no later than the 15th day of the third month of the corporation's tax year the election is to take effect.
If you file Form 2553, but miss the deadline, S status will be effective for the following year.

Example #1:

Your C-Corporation is on a calendar year (year ends December 31). You want S status to be effective for tax year 2011. File Form 2553 no no later than March 15, 2011.

Example #2:

You want S status for 2011. You procrastinate. Form 2553 gets filed after the March 15, 2011 deadline. S status will be effective the following year, 2012.

Qualifying For S-Corporation Status

1) The corporation must be a domestic corporation chartered within one of the states, or United States possessions.

2) It must have only one class of stock (but you can issue stock with different voting rights).

Avoid disqualifying loans!

Large loans, for example, loans in excess of your stock basis, could be viewed by the IRS as being an investment in stock.

Since an S-Corporation may only have one class of stock, if the IRS deems the loan to be a second class of stock, S status may be revoked.

Straight-debt safe harbor IRC Section 1365(c)(5) -This code section says that straight-debt shall not be treated as a second class of stock.

Straight-debt defined:

Any written unconditional promise to pay on demand or on a specified date a sum certain in money if -

the interest rate (and interest payment dates) are not contingent on profits, the borrower's discretion, or similar factors.
there is no convertibility (directly or indirectly) into stock, and
the creditor is an individual (other than a nonresident alien, an estate, or a trust described in paragraph (2) under this subsection.

Prepare a note:

Preparing a note with normal lending terms will help in preventing the IRS from considering the loan a second class of stock.

3) It can have up to 100 shareholders.

4) A husband and wife (and their estates) are treated as one (1) shareholder.

5) Shareholders must be individuals who are U.S. citizens or residents of the United States, estates, certain trusts (section 1361(c)(2)(A), and tax-exempt organizations described in section 401(a) or 501(c)(3).

6) All shareholders must consent in writing to S-Corporation status by signing IRS Form 2553.

7) Certain businesses cannot be S-Corporations, like banks and insurance companies.

S-corporations: Tax Reporting for an S-corporation; When an S-corporation May Be Taxed; State Taxes and S-corporations

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