The S Corporation is not a corporate type such as an LLC or a Corporation. It is an option or a permission to report income on the income tax same as a partnership, which is taken by the Internal Revenue Service to file taxes as an S Corporation instead of a C-Corporation.
The creation of an S Corporation is exactly the same as a traditional corporation and by enlarging its management structure is same as the other types of corporation which is broken down to stockholders, officers and directors.
All corporations are initially formed as a C-Corporation with the Secretary of state and later file an election by filing a form 2553 with the Internal Revenue Service to treat a C Corporation an S Corporation.
We will briefly describe the characteristics of an S corporation below:
- An S corporation is not a double taxation like a regular corporation where, a corporation pays taxes on the income and later it transfers to a stockholder as a dividend to report on the income tax return that pays taxes again on the same income.
- The S Corporation does not pay federal tax at the corporate level and holds from one to hundred stockholders maximum. It is treated as a partnership or a sole proprietorship for tax purposes.
- An S Corporation is not allowed to defer or postpone taxes like a C Corporation, taxes are paid in the year it is earned, whereas in a C Corporation, the taxes can be deferred.
- The Internal Revenue Service also allows a limited liability company to pay tax as an S Corporation.
- Officers insurance and contributions transfer to the stockholders through K1.
- A Non US resident, partnerships and corporation are not allowed to be a shareholder where as a domestic C Corporation has no such restrictions.
- An S corporation can have as much as up to 100 stockholders whereas a domestic corporation is allowed unlimited shareholders.
- The venture capital companies do not recommend an S Corporations.
- An S corporation allows one class of stocks whereas a C Corporation is not restricted.
- In an S Corporation type profits, losses, credits and deductions are reported on the Form 1040 that reduces stockholders' tax liability.
- In most cases, an S Corporation is required to adopt December year end, whereas a C corporation can either adopt fiscal year end of December.
- It provides the similar liability protection as a traditional corporation, where the personal and the business assets are treated completely separately.
- An S Corporation is unique in term of a compensation structure, because everyone who works for the company is required to take a reasonable salary regardless of a stockholder, officer or a director of the S Corporation.
Tax Effects of S Corporation:
The pass-through profit and loss process of the S Corporation, effects the stockholders' tax personal liability by applying federal, state and the city credits on the income tax such as;
Earned Income Tax Credit, Health Coverage Tax Credit, Additional Child Tax Credit, Making Work Pay Tax Credit, Non Refundable Tax Credit, Dependent Care Tax Credit, Life Time Learning Tax Credit, Retirement Savings Contributions Tax credit, Adoption Tax Credit, Premium Tax Credit, State) (New York City) Empire State child credit. Family tax relief credit. Household credit (New York State) (New York City) Noncustodial parent earned income credit and many more which local and state allows to motivate investors and residents to participate for the eligibility.
Tax Deductions To Reduce A Stockholder's Tax Liability:
There are certain tax deductions are also available which apply to reduce the S Corporation Stockholders' tax liabilities. A taxpayer either applies credit or a deduction, but not both same time.
