S Corp Tax Deductions: Everything You Need to Know

S Corp Tax Deductions: Everything You Need to Know

Can take a smaller salary and pay income taxes and regular payroll deductions, then take the remainder of profit as a distribution subject to income tax only. To form an S corp, you must prepare and file Articles of Incorporation or a Certificate of Incorporation with the proper state authorities.

Roberta specializes in contract accounting, QuickBooks and casualty losses. She was inspired to focus on casualty losses due to many people around her being affected by the Black Forest Fire in 2013.

You must also pay filing fees and any applicable initial franchise taxes or other fees. The type and amount of information required in the incorporation documents varies by state. If you incorporate through BizFilings, simply complete our online order form or place an order by phone, and we prepare and file your Articles of Incorporation. If they don’t, they risk disallowing the S corp election, and the corporation would be treated as a C corp with its corresponding restrictions.

Nonetheless, electing an S corporation has greater positive opportunities than its drawbacks. Thus, the founding owner who transfers 50 percent of the ownership to a new member could receive a disproportionate share of the income from the LLC. In an S corporation, the founders’ allocation is reduced from 100 percent to 50 percent. However, the division between salary and dividends must be “reasonable” as determined by the IRS. (The IRS watches these types of transactions very closely and will step in and re-characterize the income if it feels the payments were unreasonable).

Advantages and Benefits of an S Corp

S Corp Special Case Benefit: No Corporate Income Tax

Venture capitalists will not want to see the pass-through tax setup or a limit of 75 shareholders. In the early years of starting a business, you will have many expenses and losses. A regular corporation would have the losses locked within the company and not applied to your income.

S corporation protects all personal assets of the shareholders, and creditors are not allowed to pursue shareholder assets like real estate properties, bank accounts, etc. As has been mentioned in the first paragraph of this article, the advantages of having an S corporation outweigh any known disadvantages.

It’s advisable to seek tax and legal counsel to determine the best choice for your individual circumstance. If you will need venture capital, the regular corporation structure will be a better choice.

Key Reasonable Shareholder Salary Court Cases

What are some examples of S corporations?

In order to set up an S-corporation, you must first charter your business as a corporation in the state where your headquarters is based. Once that is completed, you must elect S-corporation status by filing Form 2553 Election by A Small Business Corporation with the IRS, which all existing shareholders must sign.

Failing to adhere to the requirements may result in an “inadvertent termination” of the S corporation status. Because of the large number of inadvertent terminations, the IRS has made it easier to cure the default.

Once the corporation has been fully established through the state, the election must be made with the IRS by filing form is Form 2553. Complete instructions for forming an S corporation are available on the IRS website. Additional information on starting and managing a new business can What is S Corporation be found on the U.S. Ability to take on More Investors – S corporations can have as many as 100 shareholders. Shareholder Protection from Liability – the personal assets of the shareholders are separate from the business assets, which protects them from judgements against the business.

Advantages and Benefits of an S Corp

Santiago received a Masters of Arts in Education from Trevecca Nazarene University in Nashville, TN. He is an Enrolled Agent with the IRS. He is a Tax Senior for WCG (formerly Watson CPA Group), and enjoys helping clients understand their tax returns and crunching the numbers. Michelle began her career in the United States Air Force where she was a Command Lead and Manager of Computer Operations. From there, she’s worked for a handful of tax and accounting firms, culminating 25 years of cross-functional expertise in business consultation, financial analysis, strategic planning and tax preparation.

How to Form an S Corporation

  • After creating the LLC or corporation, make sure to file the S-Corp election with the IRS within 2 months and 15 days from the incorporation or formation date.
  • S-corp advantages and disadvantages are two important areas that business owners need to consider when planning to elect an S corporation.

How does S Corp affect personal taxes?

The short answer is “no”, as long as the S Corp makes no distribution to the owner-employee to avoid payroll taxes. The reality is that the IRS cannot require a business to pay its employees a minimum salary.

Advantages and Benefits of an S Corp

This is because dividends are not subject to self-employment tax. Further, the S corporation can deduct the cost of the wages paid when computing the amount of income that is passed through to the shareholders. An S corporation owner can opt to receive both a salary and dividend payments from the corporation. This article will help you understand the advantages and disadvantages of an S corporation—an important first step to determine if this is the right business structure for your company. Yes, if you think you may want to go public at some point in the future, but want initial losses to flow through, consider starting with an S Corporation or a Limited Liability Company.

To Jerrod, the best thing about working at WCG (formerly Watson CPA Group) is the team atmosphere! He is a staff accountant on Pod C, assisting with tax return preparation, tax planning and payroll. https://www.bookstime.com/ After her mom stepped back from the business, Roberta took it over and successfully ran it for more than 10 years. She merged with WCG to help her clients get more consultations and planning.

You can always convert to a C Corporation at a later date, after you have taken advantage of flowing through losses. Corporations can make the election at the beginning of its existence or at the beginning of a new tax year.

If you need help with forming an S-Corporation or other business entity, you can post your legal need on UpCounsel’s marketplace. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb. Small corporations may find S-Corp election beneficial, so it’s worth considering if you meet all the guidelines. It’s best for businesses that wish to remain on the smaller side, so if you have plans to expand internationally, a standard C-Corp would suit you better.

Example of S Corporation Taxation

The Wave team can support your S-corp planning by helping you understand if incorporating makes the most sense for your business from a tax perspective. They can also walk you through processes and forms, like election Form 2553, to help you prepare the strongest possible application, and file easily with the IRS. As you look at incorporation and an S-Corp election you should weigh the tax benefits and potential administrative costs of the different structures. We see a lot of business owners not knowing their options and the associated benefits. Most S-Corps shareholders/employees should be able to save additional payroll tax by having their S-Corp pay for their family health insurance coverage.


Here’s how to decide whether to incorporate your business as a limited liability corporation or an S corporation. A shareholder distribution is a non-taxable event, and if you try to replace your regular, taxed, W-2 income with non-taxable distributions, the IRS will catch you. If you own a single-member LLC, or are part of a multi-member LLC, you’ll need to use the draw method to pay yourself.

As long as it is included as part of their wages, and their spouse is not eligible for coverage under a subsidized health insurance plan, this is another great benefit of incorporating. The number of shareholders is limited to 100 and only U.S. citizens and residents are allowed to be investors. Shareholders are not responsible for the corporation’s business debts and liabilities.

Should Your Business Be an LLC or an S Corp?

Business owners who pay themselves a salary receive a fixed amount of money on a regular basis. Terry Masters has been writing for law firms, corporations and nonprofit organizations since 1995. Her online articles specialize in legal, business and finance topics. She holds a Juris Doctor and a Bachelor of Science in business administration with a minor in finance. The requirements for starting and maintaining an S corporation may be confusing, making them difficult to stay in compliance.

Information regarding curing an inadvertent termination of an S corporation, talk to a tax professional, or contact the IRS. Voluntary termination of an S corporation is done by filing a statement with the Secretary of State, or other service center, where the corporation was https://www.bookstime.com/articles/s-corporation established. The state office will have specific instructions for who is permitted to terminate the S corporation, and which forms need to be submitted. Once the corporation has been terminated through the Secretary of State, certain information must be provided to the IRS.

Sole proprietorship and general partnership offer passed-through taxation, but some of the advantages below are not provided by these business types. S-corp advantages and disadvantages are two important areas that business owners need to consider when planning to elect an S corporation. They should look at these points critically and ensure that they align with their business goals.