Understanding U.S. Income Tax Returns for an S Corporation

Understanding U.S. Income Tax Returns for an S Corporation

Understanding the many variables of the correct preparation of a Form 1120S, the year-end income tax return for an S Corporation, is essential to properly managing your business affairs and practices. The tax law for S Corporations originated in some forty years ago and is a federal law allowing business owners to report their income on Form 1120S but to pay the taxes on these monies on their individual return Therefore there is no tax due when the Form 1120S is filed.

As S Corporation owners are going to be taxed on a shareholder's personal return, care should be exercise at least twice annually to be sure that taxes owed are paid as they are earned or accrued. Rather than having S Corporation owners also make estimated taxes, it is easier and less administrative burdensome to have sufficient withholding done from an S Corporation owner's paycheck to cover their estimated current year tax liabilities. Also withholding taxes are deemed statutorily to have been made evenly throughout the year which may preclude the potential assessment and liability of unequal earnings and or payments on a quarterly basis.

As a S Corporation does not pay any income tax and its tax issues flow down to a shareholders personal return, "tax preference" items are communicated to each shareholder based upon their respective ownership percentages. Tax preference items are those which are to be reported independently on a shareholders Personal Form 1040. More common examples of these include interest income, ordinary and qualified dividends, capital gains and losses, Section 179 depreciation and charitable contributions. Also communicated to the shareholders include their respective shareholder distributions and non-deductible expenses.

In order to companies to be qualified as an S Corporation they have to have less than 100 shareholders, have a calendar year-end, owners are to be U.S. citizens or resident shareholders and one class of stock. For the first year a corporation is electing S Corporation status it is required to submit, within 75 days of the beginning of the tax year, a Form 2533, which is a Election by a Small Business Election. If you fail to make this election on a timely basis you may still be able to qualify using Rev. Proc. 2003-43. Once a corporation becomes an S Corporation it will remain so for the life of the company unless any one of the rules of being an S Corporation are violated or by consent by more than 50% of the voting and non-voting stock of the company.

John Dillard is a Speaker/Author and Certified Public Accountant (All Rights Reserved). To See how he takes Christ along with him to work visit http://www.hiscpa.com/ (An Atlanta CPA firm) and for his latest book Overcoming Life's 9/11's: Job's Journey visit http://www.john-dillard.com/