What You Need to Know About S Corporation Income Taxes
Forming a corporation is an excellent way for any entrepreneur to protect themselves from financial risk and liability while pursuing their dream of business ownership. But if you choose an S Corporation, your work will be a little different from income taxes. What can you expect from your S Corp income tax preparation, and how can you get the best results? Learn a few answers.
How Are Income Taxes Handled for S Corps?
S Corporations are what is known as a pass-through entity. This name indicates that the profits and income tax responsibilities pass from the corporation to the individuals. The tax obligations of S Corps are very similar to such pass-through entities as sole proprietorships except that the owners are shareholders. Each shareholder’s assigned portion of profits is reported to them by the S Corporation.
What Do S Corp Tax Forms Look Like?
The primary income tax form you’ll need to file is called Form 1120-S. It is structured very similarly to the main corporation tax form, Form 1120. Like Form 1120, the S Corporation tax form calculates the company’s income and expenses. It will, though, have only limited tax computations since most taxes are paid at the shareholder level.
As with Form 1120, you will also answer questions about what other entities the corporation owns and what entities own shares in it. A final section serves to reconcile any differences between what the corporation reports for tax purposes and what it records on its books. This often accounts for variations in such things as depreciation reporting or accrual of income and expenses.
The primary way that Form 1120-S differs from its cousin is that it includes a section to assign profits to each shareholder based on their amount of stock ownership. This section, known as Schedule K, breaks down individual items — including different forms of income, specific types of deductible expenses, certain tax credits, and foreign transactions. Your accountant will then use this to prepare your Form 1040.
What Should You Do Throughout the Year?
You should perform a few housekeeping items throughout the year to ensure a smooth tax filing season. First, you’ll need to maintain your corporation within the rules for being an S Corp. For instance, you can’t add more than 100 shareholders or allow corporations or partnerships to become shareholders. A business that violates the IRS limitations on this business entity will need to file as a C Corp.
Because shareholders are liable for the income taxes related to their portions of the company profits, each shareholder should be diligent at making necessary quarterly tax payments. Quarterly payments can be calculated by your tax preparer or accountant based on a combination of last year’s tax bill and expectations for the upcoming year’s earnings. These payments may also consider other income you earn.
A mid-year tax checkup is a good idea for the company and all large shareholders. Work with your accountant to be certain you make sufficient quarterly payments to avoid an unwanted tax bill. This is also a good time to go over the corporation’s books to identify any potential problems — such as insufficient record-keeping or unusual transactions — that could affect the tax preparation appointment.
Where Can You Learn More About S Corp Taxes?
Are you new to ownership of an S Corporation? If so, things can appear very complicated. Few, if any, shareholders or managers should attempt to handle the tax obligations of an S Corp on their own. Monheit Frisch Group PLC has aided Arizona companies and shareholders to complete their pass-through entity taxes for nearly half a century. Make an appointment to learn how we can help you too.