S Corporations provide unique tax benefits for business owners, particularly when it comes to reducing self-employment taxes. At Allied Tax Advisors, we specialize in helping business owners leverage S Corporation taxation to maximize tax efficiency while ensuring compliance with IRS regulations. With our expertise, we help you navigate the complexities of S Corporation requirements and take full advantage of the benefits this structure offers.
An S Corporation is a tax election made by an eligible LLC or corporation that allows income, losses, deductions, and credits to pass through to shareholders for federal tax purposes. This pass-through taxation allows business income to be taxed at the individual level, helping avoid the double taxation often associated with traditional C Corporations. However, unlike a standard LLC, an S Corporation has additional requirements, including the need for reasonable compensation, proper record-keeping, and annual compliance.
One of the most important aspects of maintaining an S Corporation is paying reasonable compensation to shareholder-employees. The IRS requires that shareholder-employees receive a fair salary for the work they perform, which is subject to payroll taxes. Paying reasonable compensation helps avoid scrutiny and penalties from the IRS, as it ensures that employment taxes are being properly assessed on wages.
Depending on your state, certain components of state disability insurance (SDI) may apply differently to S Corporations. Allied Tax Advisors helps you navigate these specific state requirements and exemptions, ensuring that your payroll is handled correctly and complies with state regulations.
An accountable plan is an essential tool for S Corporations to reimburse employees (including shareholder-employees) for business expenses without those reimbursements being included in taxable income. By setting up an accountable plan, you can ensure that expenses such as travel, meals, and home office costs are reimbursed tax-free, reducing overall tax liability for both the company and the employee.
Maintaining annual minutes and proper record-keeping is crucial for preserving the liability protection offered by an S Corporation. Allied Tax Advisors assists in documenting key decisions and ensuring compliance with corporate formalities, reducing the risk of piercing the corporate veil.
Staying compliant with S Corporation filing deadlines is essential to avoid penalties and maintain good standing with the IRS. S Corporations must file their tax returns (Form 1120-S) by March 15th, or file for an extension to avoid late filing penalties. Allied Tax Advisors helps ensure all forms are filed on time, keeping you compliant and stress-free.
The built-in gains (BIG) tax is a corporate-level tax that applies when an S Corporation used to be a C Corporation or if it acquired property from a C Corporation in a carryover basis transaction. The BIG tax is imposed on net recognized built-in gain during the recognition period, which is generally five years after the S election is effective. Understanding the BIG tax is crucial for planning property sales and avoiding unexpected tax liabilities.
If an S Corporation's passive investment income exceeds 25% of its gross receipts from all sources, and the corporation has accumulated earnings and profits (AE&P) from C Corporation years, it may be subject to a tax on excess net passive investment income. If the passive investment income threshold is exceeded for three consecutive years, the S Corporation may lose its status and revert to a C Corporation. Additionally, if the S Corporation previously used the last-in, first-out (LIFO) inventory method, it must calculate LIFO recapture when transitioning from C Corporation status, which can result in additional tax liabilities.
S Corporations must compute their combined (bottom-line) taxable income or loss, excluding separately stated items. Separately reported items are those that could affect the tax liability of shareholders differently, such as capital gains, charitable contributions, or Section 179 deductions. These items must be reported on each shareholder's Schedule K-1, allowing them to be included on individual tax returns. Accurate reporting of separately stated items is essential to ensure that each shareholder pays the correct amount of tax.
Most states recognize the federal S Corporation status, allowing pass-through taxation at the state level. However, a few states do not recognize S Corporation status and instead impose an entity-level tax. This creates a situation where shareholders may need to calculate their state income taxes differently from their federal tax return. Allied Tax Advisors helps clients navigate these state-specific requirements, ensuring compliance and optimizing tax outcomes.
Every S Corporation is required to file Form 1120-S, which includes detailed information about the corporation’s gross income, deductions, shareholders, and distributions. The return must also include each shareholder’s pro rata share of income, losses, and credits, which are reported on Schedule K-1. Accurate and timely filing is crucial to avoid penalties and ensure that shareholders have the information they need to report their income properly.
Unlike sole proprietorships or standard LLCs, S Corporation owners can save on self-employment taxes by splitting income between wages (subject to payroll taxes) and distributions (not subject to self-employment taxes). This strategic division can significantly reduce overall tax liability.
S Corporations do not pay federal income taxes at the corporate level. Instead, income is passed through to shareholders, who report it on their individual tax returns. This helps avoid the double taxation that can occur with C Corporations.
By maintaining proper records, paying reasonable compensation, and adhering to S Corporation requirements, owners can enjoy liability protection that keeps personal and business assets separate.
We handle all aspects of S Corporation tax preparation, including filing Form 1120-S and shareholder Schedule K-1s, ensuring accuracy and compliance with all IRS regulations.
Determining reasonable compensation is critical to maintaining your S Corporation status. We help you assess industry standards and determine an appropriate salary that satisfies IRS requirements while minimizing tax liability.
We help you establish an accountable plan to manage reimbursements effectively, ensuring tax-free treatment for qualifying expenses.
From annual minutes to state compliance requirements, we assist with all aspects of maintaining your S Corporation status and ensuring your business remains compliant year after year, including managing filing deadlines and compliance status.
Get in touch with Allied Tax Advisors to schedule your consultation. Our team is ready to provide the tax expertise and peace of mind you deserve.
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