S Corporation Taxes Explained: Maximizing Benefits & Simplifying Filing

Unlock Tax Advantages, Master Form 1120-S, and Navigate Estimated Taxes with Ease

S Corporation Taxes Explained: Maximizing Benefits & Simplifying Filing

Unlock Tax Advantages, Master Form 1120-S, and Navigate Estimated Taxes with Ease

We provide expert advice, personalized services and innovative tax solutions for your business. Whether it’s a quick consultation or a longer-term project, we can assist you with

  1. Identifying your tax strategy and alternative investment strategies 
  2. Tax filing and compliance (including international and multi-state filing)
  3. Implementing stock options and equity compensation plans
  4. IRS audit management and representation
  5. Mergers & acquisitions and reorganization tax planning
  6. Shareholder and partner expansion

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To save money on an S Corp tax return, consider:

  • Paying reasonable salaries to shareholders-employees to balance payroll taxes and income distribution.
  • Maximizing business expense deductions.
  • Utilizing available tax credits.
  • Keeping detailed records of expenses and income.
  • Implementing tax-efficient strategies for income distribution and reinvestment.
  • Consulting with a tax professional for tailored advice, especially for complex issues like shareholder distributions and compensation planning.

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.

What is an S Corporation?

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. 

How does an S Corp differ from other business entities?

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.

Reasonable Compensation for S Corporation

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 Corporation Tax Filing

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.



Tips for Filing Form 1120-S​

  • Keep up-to-date accounting records and financial statements. Accurate balance sheets and income statements ensure that you don’t report too much (or too little) income. 
  • Record your income. Your business’ income is recorded in the first section of Form 1120-S.
  • Record your expenses. Expenses are recorded in the second section of the form.
  • Calculate your net profit or loss. On an S Corporation tax return, the technical name for your business’s profit or loss is “ordinary income or loss”. To calculate ordinary income, subtract your total expenses from your gross income. 
  • Record taxes owed and payments made. While shareholders normally pay S Corp taxes on their individual tax returns, there are circumstances in which an S Corporation can owe taxes at an entity level. These apply mainly if an S Corp was previously a C Corp, or operates as a multi-state business. In this event, these tax liabilities need to be recorded.
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.
Tax Planning and Accounting

4 Limitations of S Corporation Entities

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.

Schedules of Form 1120-S

  • Schedule B. This questionnaire is found on page 2 and 3 of your return. It deals with a variety of topics, from the business’s stock structure to ownership interest by shareholders.
  • Schedule K. This schedule allocates the dollar amounts of each shareholder’s percentage of ownership, income, deductions, and tax payments. 
  • Schedule K-1. This contains information to report on your individual income tax returns, including:
    • Ordinary business income or loss
    • Other income or losses, including rental, interest, dividends, royalties, capital gains or losses
    • Section 179 expenses
    • Deductions that don’t fall within the business’s overall profit or loss for tax purposes
    • Tax credits 
    • Items that affect alternative minimum taxable income
    • Items that affect shareholder basis
  • Schedule L. This is used to report your business’s balance sheet.
  • Schedule M-1. Here, you can reconcile taxable and non-taxable income, along with deductible and non-deductible expenses.
  • Schedule M-2. This schedule is a more detailed look at the shareholders’ capital accounts.

Our expert team can help you with tax filing, as well as how to report Schedule K-1 information

s-corp-extended-tax-deadline

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.

How to calculate your estimated taxes

Below are suggestions to help you calculate your estimated taxes. This is done using Form 1040-ES:

  • Start by using Schedule K-1 received for your S Corporation for the previous tax year.
  • Next, estimate your expected adjusted gross income, taxable income, taxes, deductions, and credit for the entire tax year, based on the current tax rates.
  • Complete Form 1040-ES using the IRS instructions or speak to one of our CPAs for assistance. 

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.

How to pay your estimated taxes

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.

Deadline to pay your estimated taxes

For estimated tax purposes, the tax year is divided into four payment periods:

  • April 15th – Covers income earned from January 1 to March 31
  • June 17th – Covers income earned from April 1 to May 31
  • September 16th – Covers income earned from June 1 to August 31
  • January 15th – Covers income earned from September 1 to December 31

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.

Understanding tax requirements is an important part of accurate tax filing.

Fusion CPA experts can help you.

Our team also help you implement software solutions such as QuickBooks and Netsuite to help you stay compliant with regulations.

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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.

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