S CORPORATION TAX RETURNS
How would you determine if the compensation to your S Corp officer is "reasonable"? We got you!
s corp tax returns
S Corporations are quickly becoming the preferred flow-through entity choice amongst small business owners. The benefits of choosing an S Corp as your entity structure are numerous and the process is incredibly simple. Because an S Corp is a flow-through entity, however, it is important that shareholders understand exactly how their S Corp impacts their individual income tax situation.
If you already have an existing business but would like to be taxed as an S Corporation, Savvy & Suite would be more than happy to aid in an S Corp election being made. Likewise, if you are a new business, we will walk you step by step through the process on how to start an S Corporation. Unsure of what these terms mean or confused as to the difference between entity types? Common areas of interest when discussing S Corps/other entity types are:
Partnership definition – How does this structure differ compared to an S Corporation?
S Corporation definition – What does this structure entail and can it be changed? Are there problem areas I need to watch out for?
Shareholder definition – What individuals/entities are eligible to be shareholders? Are there limits (either number or entities) on eligible shareholders? How does one become a shareholder in a pre-existing S Corp?
After a conversation with our experts, you will be up to speed on these areas and we will be sure to answer any additional questions you may have.
What does being a “flow-through entity” even mean? Like partnerships or LLCs, S Corps function as flow-through entities, which means that the tax paid on the business profits is not paid at the business level. Instead, the business profits “flow through” to the individual shareholders’ personal income tax return, which is where the tax on those profits is paid. This contrasts with C Corporations (another entity structure type), where tax is paid at the corporate level. As such, there are technically no “S Corp tax rates”; instead, the tax rate at which these profits are taxed is dependent on each shareholders’ unique personal income tax situation.
As mentioned, S Corporations offer unique tax situations, both from a compliance and from a planning standpoint. Required compliance includes Form 1120S and additional forms for the federal filing; each state has their own unique forms that are associated with S Corp filings. Having years of S Corp preparation experience, we have seen many state filings and will complete your state compliance filings without fail.
Another key compliance difference amongst S Corps is how to handle officer compensation. While other entity types have different handling of payroll to partners/shareholders, S Corps are unique in the sense that compensation to officers is required to be “reasonable”, per the Internal Revenue Code. Because there is no explicit definition of what “reasonable” is in the Internal Revenue Code, this seems to be a gray area, leaving business owners with a feeling of uncertainty. Is your officer compensation reasonable? Our officer compensation benchmarking will allow you confidently answer “yes” to this question, fortifying your stance against challenge from the IRS.
As far as planning, S Corporation sales seem to be the most questioned planning events. Because units of ownership in an S Corp are shares, the sale can be structured as either an asset or a stock sale; there are various pros and cons to each structure, but it’s important to understand the difference due to the diverse range of impacts each structure entails. Without having this conversation and understanding the consequences, shareholders could potentially be left with a big bill when they file their individual tax return in the year post-sale. Savvy & Suite’s tax professionals communicate these potential pitfalls with clients regularly, thus eliminating the risk of surprise come Tax Day.
Other areas of planning interest include distribution structure, shareholders entering or exiting the business, and whether or not the S Corp entity choice is right for your business. Specifically, in regard to this last issue, it’s important to understand that the goals for your business could shape which entity choice is right for you. S Corporations are much more flexible than C Corps, but depending on your cash distribution needs, it may make sense to be taxed as a C Corporation. One of the major benefits of choosing an S Corp instead of a C Corp is the lack of double taxation associated with C Corps. However, there still are rules governing the distribution of cash; cash must be distributed pro rata according to shareholder ownership percentages. Conversely, partnerships are often more flexible when moving assets into/out of a business, so your capital improvement needs may play a role in which tax entity structure you decide. S Corps are also a tad more rigid when it comes to the full deductibility of losses using basis calculation when compared to the deductibility rules of partnerships. All these scenarios can be run through with our expert tax professionals.
Because we also function as individual income tax preparers, we are positioned to see your tax filing process through from your business return filing to your individual income tax filing. We are ready and able to illustrate exactly how business decisions can impact your final tax bill and hope to use our knowledge to mitigate your exposure to adverse tax scenarios. We have seen many tax situations in our two decades of tax work and we’re willing to demonstrate just how valuable this experience is. Our knowledge can become your knowledge; we’ll function as your trusted advisor as your S Corp continues down the path to success.
As demonstrated, Savvy & Suite is uniquely positioned to navigate the S Corp tax law landscape. We have extensive knowledge and will aid in any compliance work or tax planning that you may have to offer. We’ll keep you informed about the benefits and restrictions associated with S Corps and be sure to share our wealth of knowledge regarding the comparing/contrasting of entity options, positioning your business for future success in the tax realm.