Should You Really Be Choosing the S-Corporation status?

The S-Corp combines the benefits of limited liability with pass through tax treatment. What does this mean? Its means that business income and deductions flow directly to its shareholders/owners who in return report profits/losses on their personal Sch K-1.

Note: S-Corp shareholders can take losses and use them to offset against their other income. Which means if you have real estate or rather any business that is organized as an S-Corp, you can use its losses( hint: even paper losses) to offset against your other active income.

Passive investors in the S-Corp business however, cannot take this major benefit.

Do My Partner And I Qualify For the S-Corp Election?

Yes, but you need to ensure the following:

a) Its a U.S Corporation with no more than 100 shareholders( Husband and wife are considered one shareholder if they own their stock jointly).

b) Shareholder/s need to be U.S Citizens or Green Card Holders or can be a small business trust too.

c) The S-Corp has just one class of stock. No preference shares etc.

d) All shareholders give their consent in writing to switch status within the IRS’ given time frame.

Bottom line: There are rules, deadlines, forms and a strict protocol to be followed when it comes to making the S-Corp election. The S-Corp is an elite status, fyi.

Useful Tips:

  • Start off as an S-Corp, once profitable , move to a C-Corp status. Reason being C-Corp offers great fringe benefits, health care, income splitting between the business and its shareholders. ( I talked about income splitting in my previous newsletter).
  • We already know by now that a smaller C-Corp( the business itself) usually gets away with paying taxes (though the shareholders do pay their share of individual income tax).
  • What happens if you are converting a C-Corp to an S-Corp? You might end up with a huge tax bill if your C-Corp had passive income from investments, or it used the LIFO method to report inventory, had unrealized gains on the C-Corp’s assets or sold appreciated assets that had not been held for a min of 10 years after the conversion.

 

 

 

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