S Status Election
If you have chosen your business entity as a Corporation, you can choose how your business will be taxed by the Internal Revenue Service (IRS). There are two ways in which it can be taxed:
- C Corporation (or C corp.)
- S corporation (or S corp.)
If you have chosen your business to elect S Status, you need to know about the following details:
What is an S Corp?
An S-Corp is taxed as a Sole Proprietorship or a Partnership if there is only one shareholder or there are two or more shareholders respectively. The best thing about the S Corporation is that it does not pay any tax in itself, but all the profits are passed on to the shareholders. The shareholders then, report the earnings on their personal income tax returns. Not all corporations are eligible to file for S-Corp Status. For example, the Corporation cannot have more than 100 shareholders and must be a closely held Corporation (i.e., one that does not have publicly traded shares).
Why is it called an “S” Corporation?
The provision of the IRS regulations that include this method of taxation is found in Subchapter S of Chapter 1 of the Internal Revenue Code. A Corporation using the Subchapter S method is usually called an “S Corporation,” an “S-Corp,” or a “Sub S-Corp.”
What Is an S-Corp Election?
If you choose your business as a Corporation and are doing nothing else, it will be taxed as a C-Corp. In order to get it taxed as an S-Corp, you are required to notify the IRS that you are choosing, or “electing,” to have it taxed as an S-Corp.
What types of Corporations are qualified to elect S Corporation Status?
The IRS has 8 qualifications for S Corporation status. These are:
- It must be a domestic (U.S.) Corporation, with no foreign investors;
- It must have no more than 100 shareholders;
- Its only shareholders must be individuals, estates, exempt organizations;
- It has no nonresident alien shareholders;
- It has only one class of stock;
- It isn’t one of the following ineligible Corporations.
a. A Bank or Thrift Institution that utilizes the reserve method of accounting for bad debts
b. An insurance company
c. A Corporation that has elected to be treated as a Possessions Corporation
d. A Domestic International Sales Corporation (DISC) or former DISC. - It has or will choose or change to one of the following tax years.
a. A tax year ending December 31.
b. A natural business year.
c. An ownership tax year.
d. A tax year elected under section 444.
e. A 52-53-week tax year ending concerning a year listed above.
f. Any other tax year (including a 52-53-week tax year) for which the Corporation builds a business purpose - Each shareholders consent
What is the Form 2553?
The Form 2553 is also known as the subchapter S election. It is expected to be filed with the IRS to get S-Corporation status for the goals of federal taxation.
When you file this Form with the IRS, you convert a C-Corporation into an S-Corporation. The form will designate where each of the shareholders or officers of the Corporation are required to sign. An Addendum Page is added with the Form 2553 that will produce the FAX number of the relevant IRS office where the Form 2553 will be required to be delivered to receive the small business tax election status from the IRS. Within a couple of weeks, you will receive a confirmation from the IRS confirming that the form 2553 has been received and that the S Corporation tax election has been granted.
What Are the Advantages of Electing S-Corp Status?
The main benefit of electing S-Corp status is avoiding “double taxation.” With a C-Corporation, you are required to file Form 1120 and any profits will be taxed at the Corporate tax rate. If any part of those profits is passed on to the shareholders as dividends, each shareholder is expected to report his or her share on their individual Form 1040 with Schedule B, Interest and Ordinary Dividends. Hence, the profits are taxed twice. Once to the Corporation, and then taxed a second time to the shareholders if any profits are distributed to the shareholders. This is known as “double taxation.”
When you elect as an S-Corporation, you are required to file Form 1120S, U.S. Income Tax Return for an S-Corporation. Unlike the C-Corp, no corporate tax is imposed on any profits reported on Form 1120S. Rather, the profits are divided according to the number of shares held by each shareholder, among the shareholders. Each shareholder is then expected to report his or her share of the profits on their individual Form 1040, along with Schedule K-1 (Form 1120S), Shareholder’s Share of Income, Deductions, Credits, etc. Nevertheless, the profits are taxed to the shareholders even if no dividends are distributed to them.
S-Corp status can decrease the self-employment taxes. The owners of Sole Proprietorships and Partners in partnerships must pay self-employment tax (Social Security and Medicare tax) on entire profits. In an S-Corp, on the other hand, the profits are lessened by the amount paid to owners as employees, so the total self-employment tax bill for the S-Corp is lower.
How Do I File an S-Corporation Election?
To file an S-Corp Status Election, you need to use the Form 2553.
Form 2553 provides the IRS with complete information about the Corporation requesting S-Corp status for your business and about the Corporation’s eligibility for electing this status. The following information is required to file Form 2553:
Part I:
- The name and address of your Corporation
- The date and state of incorporation
- The employer ID (EIN) of the Corporation
- The tax year for which the election is to be valid (You can choose from the options of a tax year.)
- If the Corporation has changed its name or address after applying for S-Corporation status
- The name, address, and phone number of a legal representative or Corporate officer who can be contacted for further information.
- If you have more than 100 shareholders, but you are considering members of a family as one shareholder to keep the number under 100, there is a box to check.
- If you get delayed in filing the election, you have the chance to claim that you had “reasonable cause” for filing late.
- The last section requires a list of all the shareholders who must approve the election, with the number or percent of shares owned, tax year of each shareholder and date acquired.
- Each shareholder must also sign and date the form.
Part II covers questions about the Corporation’s tax year
Part III describes Qualified S Trust Elections
Part IV covers Late Corporate Classification Election Representations
Who elects the S Corporation Status?
Usually, entrepreneurs select the S-Corporation as the entity of choice for the following reasons:
- Unlike Sole Proprietors and the partners in a Partnership, the shareholders of the S-Corporation are awarded the same level of Limited Liability and personal asset protection as of the shareholders of a Corporation.
- The S-Corporation merges the advantages of the Partnership, Sole Proprietorship, LLC and the Corporation into one entity.
- The S-Corporation allows shareholders to avoid the “double taxation” levied on shareholders of C-Corporations that is because all of the income or losses in an S-Corporation are reported only once on the personal income tax returns of the S-Corporation’s shareholders
How can IncParadise Assist You?
If you choose us to form an S-Corporation on your behalf, we will prepare the form 2553 and deliver it to you with your filed Articles of Incorporation. We can help with S status filing. Preparing forms and filing. The fee is – $45.
If this is a new Corporation the filing must be done in 60 days or less after Incorporation. The current Corporation can change to S status for current tax year if election is within two months and fifteen days of the beginning of the tax year. You can order online form for S-Corporation status.