Becoming an S corporation for United States federal income tax purposes can be a very enticing thing to do.
S corporations are unique in that they don’t pay federal income taxes. The incomes and losses are divided among the corporation’s individual shareholders instead. Unlike C corporations, S corporations are not double-taxed through the company’s profits and shareholder dividends, which is perhaps the most important part of S corporation status. Predictably, this can result in substantial income savings.
There are a variety of other benefits a corporation can gain from electing to be treated as an S corporation, including the ability to offset losses against taxable income from other sources. Also, some corporate penalties and the federal alternative minimum tax do not come into play for an S corporation.
It is important to note that while S corporations have many advantages, there are other operational matters that should be considered. Firstly, there are other costs associated to S-Corp election, such as filing an annual S corporation tax return and quarterly and annual payroll tax paperwork. Individual and corporate assets also need to be separated.
Regardless, S corporations are becoming ever-popular in the United States. There were about 725,000 in the United States as of the mid-1980s, yet these numbers grew to more than 3 million by the early 2000s. They are currently the number one type of corporate entity.
But the Internal Revenue Service has had ongoing problems with S corporations, only 25 percent of which are believed to be in compliance. The IRS in recent years has worked to increase the number of taxes collected for S corporations.
The complete S corporation rules are contained in Subchapter S of Chapter 1 of the Internal Revenue Code (sections 1361 through 1379). It is a good idea to consult an experienced attorney to learn the ins and outs, advantages and disadvantages, of becoming an S corporation.
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