Federal S Corporation Tax Treatment

One significant disadvantage of the regular C corporation is double taxation.  A C corporation pays federal income taxes at the corporate level and C corporation shareholders pay taxes on any distributions [dividends] from the C corporation on their personal returns.  These distributions to the shareholders are not deductible to the corporation.  That means the money is taxed at the corporate level and again at the individual level.  In an effort to preserve the liability protection that a corporation provides to the owners [shareholders] but avoid this double taxation, the federal S corporation was created.

 A federal S corporation is treated as a “pass-through entity” for purposes of federal income taxes.  That means that the corporate income, gains, losses and deductions are not taxed at the corporate level for federal purposes but are passed-through prorate to the shareholders and taxed on their personal returns.  This avoids the C corporation double taxation.

To elect to be treated as an S corporation, the shareholders must execute and submit federal Form 2553, Election by a Small Business Corporation, no later than two months and fifteen days from the beginning of the first tax year for which the election is to be effective.   Certain corporations with reasonable cause can request that a Form 2553 that is not filed on time but is filed as an attachment to the federal Form 1120S, US Income Tax Return for an S Corporation, for the first S corporation year be treated as timely filed.

If a business elects to be treated as an S corporation for federal purposes and the IRS accepts that election, the S corporation is required to file an annual federal Form 1120S, even if there is no income, for as long as the S election remains in effect.   Generally, the due date for the federal return is March 15.  There is a six month extension available which postpones the filing deadline to September 15.

Each shareholder will annually receive a Schedule K-1 from the corporation [part of its 1120S federal corporate tax return] identifying the shareholder’s share of each item of taxable income or deduction.  The shareholder’s personal federal income tax return must report this information.

For information on the Pennsylvania S corporation tax treatment, please see “Corporate-Income Taxes” “Pennsylvania S Corporation Tax Treatment” under the “Tax Rates” tab on the blog.

If you have specific questions about your S corporation or are looking for a tax preparer, please contact us at 724-834-3900.

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Roy & Associates, PC serves clients in western Pennsylvania located predominantly in Westmoreland County, Allegheny County, and Fayette County.