BENEFITS OF S CORPORATION/TAX ELECTION UNDER THE NEW TAX PLAN.

S Corporation

A business may elect to be an S Corporation (S Corp) by filing form 2553. This will provide additional tax benefits for the S Corporation as there is no taxation at the corporate level. All profits and losses will pass through at the shareholder level.

Restrictions on S Corporation

The following are the requirements to make an S Corporation election :

The S corporation needs to be a domestic corporation. They must have been created under federal, state, or U.S. territory

S Corporation election should be approved by all shareholders

One class of stock can be issued by the corporation. This stock can have both voting and nonvoting shares.

S Corporation can have a maximum of 100 shareholders. Husband and wife are counted as one member.

Nonresident aliens or non-human entities are not allowed to be shareholders. Estate or trust that is authorized to be an S corporation shareholder under the tax laws is permitted as a shareholder. Certain exempt organizations, such as qualified pension, profit-sharing, and stock bonus plans, or charitable organizations will be allowed to be shareholders in an S corporation (for purposes of determining the number of shareholders of an S corporation, a qualified tax-exempt shareholder counts as one shareholder).

An S Corporation can own 80% or more of C Corporation. Also, it can hold certain qualified wholly owned subsidiaries and C Corporation subsidiaries. The C corporation subsidiary can then elect to join in the filing of a consolidated return with its affiliated C corporations, but the S corporation cannot join in the election.

 

Benefits of choosing S Corporation under the new tax law that takes effect in 2018

The net income of pass-through entities like S corporations is currently taxed under ordinary income tax rates. Under the new tax law section 199A, businesses can take a 20% deductions if the income is a ‘qualified business income’. Certain types of income from service businesses like CPA firms or attorney firms are excluded & do not qualify for this deduction.

This deduction is also not available for single filers above $157,500 and joint filers above $315,000 in taxable income.

If you require further help, consult a tax professional who can review your tax situation and guide you through the S Corporation/ S tax election process. You can also contact us via our web form for any additional questions and be filing your S Corporation status.

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