PA S Corp: Everything You Need to Know
A PA S corp is any domestic or foreign corporation that is operating in the state of Pennsylvania and doing business. 4 min read updated on January 01, 2024
What Is a PA S Corp?
A PA S corp is any domestic or foreign corporation that is operating in the state of Pennsylvania and doing business. The only exceptions are businesses that have completed the Election Not to be Taxed as a Pennsylvania S Corporation form, which is REV-976. Unless the domestic or foreign S corporation has filed Form REV-976, it must follow all personal income and corporation tax requirements and regulations that apply in the state.
In the past, corporations that elected to be taxed as S corporations had to file Form REV-1640, which is the Corporation Election and Shareholder's consent form in the state. However, starting with the tax year of January 1, 2006, this requirement was lifted from corporations operating in the state. Since Act 67 passed in 2006, all S corporations that fall under federal subchapter S are recognized in the state of Pennsylvania. This act also outlines that any federal subchapter S corporation can elect not to be taxed as S corporations in the state.
In order to change the taxation election, the owner must complete and file Form REV-976, which is the Election Not to be Taxed as a Pennsylvania S Corporation form. The form must be turned in before the first period of when the business owners want the election to take effect. The benefits of S corporations in Pennsylvania include pass-through taxation of all profits from the business, the more formal business structure of a corporation, and limited liability for the owners.
An S corporation operating within the state starts as a standard corporation. It only becomes an S corporation when the shareholders of the business choose to file Form 2553 with the IRS, which is the formal way to elect the federal tax status. Form 2553 can only be filed after the shareholders have filed official tax documents with the appropriate state office. Similar to a C corporation, the state of Pennsylvania recognizes an S corporation as its own separate entity. It may be treated like a person, separated from the owners of the company.
Shareholders of S corporations can take advantage of the limited liability for any obligations, liabilities, and debts of the business. Legal action taken against the business likely wouldn't extend to the individual shareholders on a personal level either.
The only difference between S and C corporations is the way that taxes are handled. The shareholders of a corporation must decide whether they want to elect for taxation as a C or an S corporation. A C corporation is taxed based on regulations in the IRS Code, subchapter C, while an S corporation follows the rules in subchapter S. If the shareholders don't fill out and file the election form, the default taxation is as a C corporation.
By electing for S corporation taxation, the corporation must follow all tax rules outlined in the IRS Code subchapter S. This code was enacted in 1958 and undergoes periodic amendments as needed. Prior to being taxed in this way, the corporation must receive approval from the IRS to change its status to Subchapter S. As its own person or legal entity, an S corporation is distinct and separate from the shareholders of the business.
Filing the PA-20S/PA-65 Information Return
If a corporation is recognized as an S corporation on a federal level but the shareholders haven't elected for taxation as an S corporation through the state of Pennsylvania, the business must file the Information Return (Form PA-20S/PA-65) with the state. This form will report the losses, deductions, income, etc. from the operations of the business. All losses and profits of an S corporation in Pennsylvania can be passed through the business to shareholders, both residing inside and outside of the state. Those shareholders must report their shares on their individual tax returns.
If Form PA-20S/PA-65 is required, additional information must be filed with it, including:
- Supporting documents and statements
- Schedules NRK-1 and RK-1 (which come from other pass-through business entities)
- Federal Form 1120S
- Federal Schedule K-1
Additionally, S corporation shareholders should include any copies of the federal Schedule RK-1 that have been provided to shareholders within the state, along with federal Schedule NRK-1 that have been provided to shareholders that do not reside within the state. If applicable, the information return should also include the catch-up or final withholding payment. If the PA-20S/PA-65 information return includes a final withholding payment, it should be sent to a different address than if it doesn't.
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