S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income.
To qualify for S corporation status, the corporation must meet the following requirements:
(1) Be a domestic corporation;
(2) Have only allowable shareholders;
• May be individuals, certain trusts, and estates and
• May not be partnerships, corporations or non-resident alien shareholders
(3) Have no more than 100 shareholders;
(4) Have only one class of stock;
(5) Not be an ineligible corporation (i.e. certain financial institutions, insurance companies, and domestic international sales corporations).
In order to become an S corporation, the corporation must submit Form 2553 Election by a Small Business Corporation signed by all the shareholders.
States impose tax laws and regulations for corporate income and distributions, some of which may be directed specifically at S Corporations. Some but not all states recognize a state tax law equivalent to an S corporation, so that the S corporation in certain states may be treated the same way for state income tax purposes as it is treated for Federal purposes. A state taxing authority may require that a copy of the Form 1120S return be submitted to the state with the state income tax return.
Some states such as New York and New Jersey require a separate state-level S election in order for the corporation to be treated, for state tax purposes, as an S corporation.
S Corporation needs to file Form 1120-S to report the income, gains, losses, deductions, credits, etc. Form 1120-S generally must be filed by March 15 of the year immediately following the calendar year covered by the return or, if a fiscal year (a year ending on the last day of a month other than December) is used, by the 15th day of the third month immediately following the last day of the fiscal year. The corporation must complete a Schedule K-1 for each person who was a shareholder at any time during the tax year and file it with the IRS along with Form 1120S. The second copy of the Schedule K-1 must be mailed to the shareholder.
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The IRS Schedule C (Form 1040) is commonly utilized by individuals to submit their individual income tax returns, disclosing their annual income, and determining the taxable portion after accounting for tax deductions and credits. The following will talk about entities that are required to report on Schedule C, as well as the specific deductions applicable to Schedule C.
Maintaining accurate and organized records is a crucial obligation for small business proprietors, irrespective of the size of their workforce, the nature of their services, or the type of business entity. Recordkeeping involves the systematic and methodical storage of business documents. The subsequent section examines the significance of recordkeeping for small businesses and outlines the recordkeeping requirements stipulated by the IRS.
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