S - Corporation
In an S - Corporation, the business entity itself doesn't pay taxes; the shareholders are taxed as a part of their individual income tax. The tax burden impacts the shareholders directly; thus, we need to ensure a proper tax plan is in place to reduce any liabilities incurred due to losses. Some key pointers to consider are.
- Some income and expense items are subject to separate rules regarding identification for tax purposes, like charitable contributions, capital gains, and foreign taxes.
- Incomes and losses are distributed according to share ownership.
- Losses and deductions are subject to passive activity rules.
- Avail corporate and shareholder level deductions with Code Sec. 179.
- Deduction on domestic production activities.
- Fringe benefits tax treatments.
- Avail below-market loans between S - Corporation and shareholders.
- IRS Scrutiny of shareholder distributions who have not received compensation.
Advantages:
- The most popular structure among small businesses.
- Your personal assets are not at risk from liabilities in the business.
- You will not have to pay corporate-level tax in most cases.
- Losses can be claimed to a certain extent from individual tax returns.
- No alternative minimum tax (AMT) liability.
- FICA tax is restricted to employee salaries paid out.
- Not subject to accumulated earnings tax.
Disadvantages:
- Cannot have more than 100 shareholders.
- No shareholder can be a nonresident alien, corporation, and most estates and trusts.
- Cannot own subsidiaries, making it challenging to expand.
- S - Corporations have only one class of stock, restricting their ability to raise capital.
- S - Corporation may be liable for a tax on its built-in gains.