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Updated for 2011

Business Structures

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Tax Reporting for an S-corporation

An S-Corporation files Form 1120S annually.
Form 1120S is due on the 15th day of the third month following the end of its tax year.
- For a calendar year, Form 1120S is due March 15th (or the next business day if the 15th falls on a Saturday, Sunday, or holiday).
Form 7004 is used to file for an automatic 6-month extension.
An S-Corporation reports income, deductions, credits, gains, and losses to each shareholder annually on Schedule K-1.
Each shareholder is responsible for the taxes on his/her share of income.

Don't file your copy of Schedule K-1 with the IRS. Keep it for your own records. Attach it to your copy of Form 1040.

When an S-Corporation May Be Taxed

There are three instances when an S-Corporation itself (the corporate entity) will be liable for taxes.

These instances may occur as a result of operating as a regular C-corporation for a period of time before electing S status.

(Note: If S status is elected and approved immediately after initially incorporating, these items will not apply to your new S-corporation.)

Note that S-Corporation shareholders are not directly liable for these taxes.

The following three items may result in tax for an S-corporation (not directly to the shareholders):

Built-in gains: Property held by a C-Corporation that has appreciated in value upon conversion to S status, will include a so-called, built-in-gain to the date of conversion.
- The gain is the excess of the market value over the adjusted basis of the property at the date of conversion.
- This gain is reported as a built-in-gain if the property is sold or disposed of within 10 years of the conversion.
LIFO (Last-In, First-Out) recapture:
- LIFO is an inventory cost-flow assumption. FIFO (First-In, First-Out) is another inventory cost-flow assumption.
  - LIFO results in a lower ending inventory, and generally lower taxes (during times of inflation). FIFO generally results in a higher ending inventory and higher taxes.
  - LIFO recapture is the excess of FIFO ending inventory over LIFO ending inventory. This excess amount is the amount by which net income was understated as a result of using LIFO instead of FIFO. This excess amount is recaptured as income and taxed to the S-Corporation.
Passive investment income: An S-Corporation must pay tax on excessive passive investment income earned during a tax year when it operated as a C-Corporation. A tax results when passive investment income exceeds 25% of gross receipts.
- Passive investment income includes: rents, royalties, dividends, interest, annuities, and proceeds from the sales or exchange of stock or other securities.
- If all accumulated earnings and profits are distributed to shareholders before year-end, the corporation can avoid paying the tax. However, the shareholders will have a taxable dividend.

Remember, if you incorporate your business, and immediately after incorporation, you elect S status, and it's approved, you won't have to worry about any of these items; they won't apply to your new S-corporation. It will be treated strictly as a pass-through entity.

State Taxes and S-corporations

Although an S-Corporation generally doesn't pay federal taxes, some states may assess a minimum tax on an S-Corporation. Check with the state of incorporation.

S-corporations: Taking Money Out of an S-corporation

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