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S corporation taxes vary by jurisdiction, with federal and state elections allowing corporations to transfer gains and losses to shareholders, who pay tax on their allotted share of income. S corporation status allows for single-level taxation, avoiding double taxation. Specific requirements must be met, and shareholders retain limited liability.
The different types of S corporation taxes vary by jurisdiction. Corporate elections are held at the federal tax level in the United States. Some states within the United States also require the corporation to hold a statewide election at the same time as the corporation making federal elections under subchapter S of chapter 1 of the Internal Revenue Code. This election allows a corporation to transfer its gains and losses to its shareholders, who are required to pay tax on their assigned share of the company’s income.
Once a corporation makes a federal election for Subchapter S status, the corporation is no longer taxed on corporate gains or losses. The company’s shareholders pay all federal taxes on the S. The company is responsible for all taxes associated with its employees and all required state taxes. Shareholders pay individual income tax on their allotted share of the company’s income or loss.
The corporation and individual shareholders benefit when the corporation makes an election to become an S corporation. S corporation taxes allow the corporation’s income to be taxed at only one level. Under normal circumstances, a corporation’s income is taxed at the corporate level and all dividends paid to shareholders are again taxed at the individual level. With the election of the S Corporation, the shareholders pay income tax, effectively avoiding double taxation.
Specific requirements must be met by a corporation in order to make an election to an S corporation and receive the benefit of S corporation taxes. As long as these requirements are met, the corporation can remain an S corporation. When one of the requirements is no longer satisfied, the company immediately returns to the normal tax regime.
A company that has elected status S under the corporation tax provision S receives the preferred tax status; however, there is no change to his normal corporate status. The shareholders of the company retain limited liability for any actions taken by the company, unlike a partnership or sole proprietorship. These special tax rules allow shareholders to benefit from the formation of a company for liability purposes and to pay individual tax on the income earned by the company.
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