The S Corporation. How It All Works!. Presented By: Mark Borel, CPA Mark Borel & Associates, Inc. What is an S Corporation?. The S corporation was formed by Congress, for use by small business owners, offering the best characteristics of both a C corporation and a partnership
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How It All Works!
Presented By: Mark Borel, CPA
Mark Borel & Associates, Inc.
The S corporation was formed by Congress, for use by small business owners, offering the best characteristics of both a C corporation and a partnership
It has become the most popular business entity type in recent years
Numerous studies indicate lower overall taxes are paid when an S corporation is utilized.
Same liability protection
Separate legal entities
The owners are shareholders
Long standing case law
Easy transfer of ownership
Broader range of deductible expenses
Neither entity pays tax on net income
Both are “flow through” entities, so net income and loss is reported on the owners’ tax return
Losses can be claimed up to the investment in the entity
Losses can be claimed against ordinary income
Different income types “keep their character” as they flow down to the owner (i.e., interest income, L/T capital gains, etc.)
- Filing deadline is 75 days from the first day of the
proposed S year
- In recent years, the IRS has approved late filing of S
elections, but no later than the extended due date of the
Well suited for a single owner, and when owners are family members, or when the shareholders happen to be a few friends or acquaintances, and/or
When the company has no plans to attract investors by “going public”, and/or
When >10% owners plan to offer services such as consulting, accounting, engineering, law, etc. to the general public; Used to avoid classification as a “personal service corporation” (PSC) and 35% flat tax on net income, and
When owners desire to remove most of the profits from the companyWhen Should an S Corporationbe Used?
- Salary income as an employee (Form W2)
- Investment income as a shareholder (Form K1)
“Flow through” income reported on Form K1 is subject to only federal income tax:
“Employment” related income reported on Form W2 is subject to both federal income tax and employment taxes:
No double taxation of distributions to shareholders
Income automatically flows to the shareholder level where tax rates are lower than corporate rates
“Flow-through” income is subject to ordinary income tax rates, but not employment taxes.
“Flow-through” income retains it’s characteristics, possibly qualifying for special tax rates at the shareholder level, i.e., 15% capital gain rate applied to long term capital gains
Income of the company is easily distributed to shareholders
Call 888-243-6555 to receive your complimentary whitepaper outlining a side-
by-side comparison of C Corporations vs. S
Mark Borel, CPA, President
Mark Borel & Associates, Inc.