S Corp Election Deadline: Everything You Need to Know
An S corp election deadline depends on how far you are in the S crop filing process.3 min read
An S corp election deadline depends on how far you are in the S crop filing process. When creating a corporation, the IRS assumes it is a C corporation, unless you petition to turn your business into an S corp. All corporations are C status by default. If you fail to elect S status, the business will pay taxes on net income for that year. Such a tax may benefit your business in recognition of the Tax Cuts and Job Act, which starts in 2018, or the act may do your business harm, depending on your goals and circumstance.
The bottom line is that your approach to taxes makes a big difference in your income and determines how much additional capital you’ll have to reinvest in your business. If you conduct your research, you may save on taxes while enjoying the benefits of a corporation.
An S corp is an election that’s filed with the IRS, allowing the corporation to be taxed as a partnership or sole proprietor. Further, an S corp election does not change the corporate structure. For example, your C corp can be taxed as an S corp, and the business will still adhere to all corporate rules and regulations, including liability protections. Also, LLCs can be taxed as an S corp.
The taxable income of a corporation is dispensed to each shareholder when S corps are created. Members then file such income on their personal tax returns. Such a method could benefit members through the 2017 taxable year, where corporate tax rates were 35 percent. On an individual level, you may receive up to $416,700 yearly without entering such a tax bracket, which is why the tax obligations on corporate income would be less by dispensing income to the shareholders. The new act also cuts corporate tax rates to 21 percent.
A single individual would get a similar personal tax classification of 22 percent with an income of $38,701, and a C corp could possibly save one percent by keeping its income and paying taxes on that income. With that, such a scenario is only theoretical, and you should contact an accountant or attorney to know the best options available to you.
S Corp Benefits
An S corp yields certain benefits that other business entities cannot offer:
- Double Taxation: S corps are taxed distinctly from the owners, and S corps are not taxed as a business. On the other hand, net income from C corps would be taxed two times, once at the business level and another at the shareholder level when they file their taxes. Also, an S corps does not file its own tax return; shareholders would only file taxes based on their personal returns. For instance, an S corp shareholder would be taxed on ownership percentage.
It should be noted that you’ll need to pay 50 percent of profits if you own 50 percent of the S corp. (ex. Business generates $50,000 profit for the year, and you’ll pay $25,000 in taxes). Because the income may be taxed in the form of a distribution, you may get a more favorable tax rate, but you should speak with a tax advisor regarding distributions and certain rates.
The key when it comes to S corps is the avoidance of double taxation, and an S corp is completely distinct from the owners.
S corps come with a number of advantages, but the IRS levies certain restrictions that you need to be aware of:
- S corps cannot be owned by over 100 shareholders.
- Shareholders within an S corp must be people (not organizations in the form of partnerships or LLCs).
- Owners must be legal U.S. residents.
- S corps are only permitted one stock class (no tiered stockholders allowed).
When it comes to registration, you need Form 2553 to register as an S corp. You need to send the form to the IRS, and officials will send you a notice confirming your election request. Before filing Form 2553, however, you must first register your corporation through the following means:
- Drafting and registering your articles of incorporation
- Establishing by-laws
You need to incorporate in the state where your business conducts a majority of its operations. Further, verify that your business meets the necessary criteria upon registering for S corp classification. When registering, the form needs the signature of all shareholders.
To find out more an S corp election deadline, post your legal need to our UpCounsel marketplace. UpCounsel’s attorneys will give you vital information on election deadlines and other requirements you need to satisfy in order to successfully register your business. Moreover, they will help you navigate IRS tax codes so you can save money that you can use to expand your business operations.