What is an S Corporation?

An "S Corporation" is a for profit corporation which is eligible and elects to be treated as an S Corporation under US Tax Law (Section 1362(s) of the IRC) as of the effective the date of the S Corporation election.  S Corporations typically do not pay taxes and instead file an informational return Form 1120S showing net profit or loss which flows through to the owners (AKA shareholders).  The shareholders then show the net profit or loss on their personal tax returns.  All S Corporations start as a regular or professional corporation, and only by requesting the S Election to the IRS can it act as an S Corporation.

 

S Corp Election Requirements

To become an S Corporation, the corporation must submit a completed Form

2553 (AKA S Corp. Election) to the IRS two months and 15 days after the beginning of a corporation's tax year.  For most S Corps, that would be on March 15th since most tax years begin on  January 1st.  For newly formed corporations the first tax year would start on the earliest of either: the

 

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date it first had assets, the date it first had shareholders, or the date it first operated.  However, it cannot be before the corporation's formation date.

 

For example, if a corporation was formed on March 12th, it issued stock on April 10th, it opened a checking account on April 17th, and started business operations on July 1st, the beginning date of the S Corporation's frist tax year is April 10th.  Therefore, the IRS must  receive the S Corp election no later than June 25th for the S Corporation election to take effect during its first tax year.  If received after this, the corporation wouldn't be able to operate as an S Corporation until January 1st of the next tax year.

 

As long as your corporation qualifies as an S Corporation, the application was filled out correctly, and filed within the required time (as described above) you can begin operating as an S Corp. starting the date you requested on the Form 2553.  IRS often takes from four to eight weeks to return acceptance.   So, do not wait for this before beginning operations.  For this reason, we recommend faxing the form to the IRS because your fax confirmation is the only proof of filing this form until receipt of IRS acceptance.

 

Who May Elect

Not all corporations can qualify to be an S corporation.  But, most small corporations do qualify.  Here are the basic requirements:

       Less than 100 shareholders

       Ownership is limited to US citizens or resident aliens

         Shareholders must be individuals, estates, & certain exempt organizations

 

Tax Benefits

The main reason for being recognized as an S Corporation is for the tax savings.  By allowing the corporation's profits or losses to pass through to the shareholders, the shareholders avoid double taxation, which is an issue with a regular corporation (AKA as C Corporation). 

 

One of the best methods of saving taxes for the S Corporation, is to reduce FICA or Self Employment Taxes.  For example, if a contractor were paid $100,000 per year, the contractor would have to pay self employment taxes of about $15,000 per year.  However, if the contractor's S Corporation were paid $100,000 and the S Corporation paid the contractor a $50,000 salary (this must be considered a fair wage) for services, the contractor would only have to pay FICA (same as self employment taxes) on his $50,000 wages or about $7500, saving the contractor about $7500 each year in taxes!

  

Need Help filing your S Election?

Order our S Corp Filing Assistance Service and get the following:

  • Form 2553 prepared for your corp
  • Simple 1 page instructions
  • Our hand holding, if needed
  • New and existing corporations

Simply review, add two pieces of info, sign, & fax to the IRS...

Your Corporation is now an S Corporation

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More Helpful Information

       Save Big Tax Money; go Sub S!

       Form 2553

       Form 2553 Instructions

        A Comparison of Business Entities

        Form 1120 S

        Form 1120 S Instructions