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To save money on an S Corp tax return, consider:
This depends on various factors, including the specific financial circumstances of the business and its income levels. Generally, C Corps are subject to corporate income tax at the corporate level and shareholders also pay taxes on dividends at the individual level (double taxation). S Corps have pass-through taxation, meaning income is reported on the owners’ individual tax returns and taxed at their personal rates, avoiding double taxation.
In some cases, C Corps might pay more due to double taxation, but they also have tax benefits not available to S Corps. The more advantageous structure depends on the specific financial details and goals of the business.
Selling your S Corp affects your taxes in these key ways:
Capital Gains or Losses: The sale can result in capital gains or losses for the shareholders, based on the difference between the sale price and the shareholders’ basis in the S Corp stock.
Tax Reporting: Gains or losses from the sale are reported on the shareholders’ individual income tax returns.
Asset Sale vs. Stock Sale: Tax implications vary significantly depending on whether the sale is structured as an asset sale or a stock sale, with asset sales potentially leading to different tax treatments for individual assets and liabilities.
Potential Recapture of Depreciation: If assets have been depreciated, there may be recapture taxed as ordinary income.
State Taxes: State tax consequences can also apply, depending on state-specific tax laws.
The foreign tax credit is limited based on the US tax rate and foreign source taxable income. S corporations must provide detailed information on Schedules K-2 and K-3 to their partners and shareholders for accurate tax reporting.
These schedules were introduced to accommodate the complex requirements of the Tax Cuts and Jobs Act (TCJA), focusing on the increased information needed for calculating U.S. tax liability related to international tax relevance.
Also, exceptions exist based on the nature of your S Corporation’s activities and its partners. For instance, domestic S Corporations with no foreign activities or partners may have different reporting requirements.
The S corporation or S corp (named for being subchapter ‘S’ of the Internal Revenue Code) is ideal for those who want don’t want to go public or attract institutional investors.
S Corps have a capped number of shareholders. These can be individuals, estates, and certain types of tax-exempt entities or trusts, as long as they are US citizens or permanent US residents. Additionally, S Corps have only one class of stock, and only one level of taxation.
These aspects make for easier tax filings. This, in turn, makes S Corps the perfect entity for many lifestyle businesses.
These are businesses that aim to support a particular level of revenue with as few employees as possible. That way, they generate an income level to sustain a preferred lifestyle.
Like C Corporations, S Corps offer liability protection. Unlike C Corps, dividend distributions to shareholders are not taxed.
Similar to a partnership, S Corps are not taxed at entity level. Instead, profits flow to shareholders, and are reported on their individual tax returns. This is what is called a pass-through entity.
S Corp owners must be paid reasonable market compensation for their roles. However, there have been numerous debates around this – as the rules differ between states and industries. As such, determining reasonable compensation can be challenging, as there is no universal calculation to calculate this for shareholder-employees. Thankfully, our CPAs can help you with best practices for reasonable compensation.
S Corporations use Form 1120-S to file tax returns. Each S Corp shareholder also completes Form K-1 on their individual tax returns. This records their allocation of income and losses, along with other business information, such as the sale and purchase of assets.
Understanding the limitations that come with S corp entities can help you ensure your business has adequate processes in place to mitigate some of the regulatory drawbacks of forming an S corporation.
An S Corp is generally required to make estimated tax payments. Taxes must be paid for the income you receive throughout the year. You can choose to withhold these taxes (by saving an estimated amount from gross wages to pay directly to the government), or make estimated payments. Estimated payments cover income and other taxes, such as self-employment and alternative minimum taxes.
Below are suggestions to help you calculate your estimated taxes. This is done using Form 1040-ES:
If your estimate was too high or too low, complete a second Form 1040-ES to recalculate your estimated tax for the next submission period.
Form 1040-ES can be submitted along with your estimated payment by mail, online, or via the IRS2Go app. You can pay your estimated taxes once-off or in installments, as long as the total amount is paid by the deadline at the end of the quarter.
For estimated tax purposes, the tax year is divided into four payment periods:
NOTE: If the payment deadline falls on a weekend or legal holiday (i.e. Martin Luther King, Jr. Day in January, and Washington D.C.’s Emancipation Day in April), you have until the following business day to submit your payment.
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Disclaimer: This page is not intended to be the rendering of legal, accounting, tax advice, or other professional services. Articles are based on current or proposed tax rules at the time they are written, and older posts are not updated for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.
