Introduction to US Business Taxes for S Corp Form 1120S: Basic to Advanced Concepts
Understanding S Corporation and Form 1120S
When it comes to business taxes in the United States, S Corporations (S Corps) play a significant role. S Corps are a popular choice for small to medium-sized businesses due to their flexibility and the potential tax advantages they offer. To file their annual tax returns, S Corps must use Form 1120S, which is specifically designed for this business entity.
Basic Concepts of S Corp Taxes
As an S Corp, your business is considered a pass-through entity, meaning that the profits and losses "pass through" to the shareholders' personal tax returns. This eliminates the double taxation that C Corporations face, where both the corporation and its shareholders are taxed separately.
One of the key advantages of an S Corp is that the business itself does not pay federal income taxes. Instead, the shareholders report their share of the business's income on their individual tax returns and pay taxes accordingly.
Form 1120S is used to report the S Corp's income, deductions, gains, losses, and credits. It also provides information about the shareholders' pro-rata share of these items. The form is due on the 15th day of the third month following the end of the tax year, which is typically March 15th for calendar year S Corps.
Advanced Concepts and Considerations
While the basic concepts of S Corp taxes are relatively straightforward, there are some advanced concepts and considerations to be aware of:
Reasonable Compensation: S Corp shareholders who work for the business must receive reasonable compensation for their services. This ensures that the IRS does not reclassify too much of the business's income as distributions, which are subject to lower tax rates.
Distributions: S Corp shareholders can receive distributions, which are generally tax-free, as long as they do not exceed the shareholders' basis in the company. Basis is the amount of money or property that a shareholder has invested in the S Corp.
Passive Income: S Corps must be careful not to generate too much passive income, as it can result in the loss of S Corp status. Passive income includes rental income, interest, dividends, and certain capital gains.
Shareholder Loans: Loans from shareholders to the S Corp should be properly documented and structured as legitimate debt. Otherwise, the IRS may reclassify them as contributions to the company's capital.
Estimated Taxes: S Corps are generally required to pay estimated taxes on a quarterly basis to avoid penalties. These payments are based on the expected annual tax liability of the business.