Taxation of S Corporations

Taxation of S Corporations

Description

An S corporation is purely a creature of federal tax law; it is a corporation that elects to be taxed under subchapter S of the Internal Revenue Code. Essentially, such an election exempts the corporation from federal income tax and subjects its shareholders to tax on the net corporate income. In theory, an S corporation enjoys the legal benefits of the corporate form with the tax benefits of a partnership. That description more closely characterizes the attributes of a limited liability company, however, because the taxation of an S corporation differs markedly from that of a partnership. While an S corporation, like a partnership, is a pass-through entity, the legal rules under sub- chapter S are much simpler than the rules for partnerships under subchapter K. An S corporation trades flexibility for greater simplicity. Over the past few decades, however, Congress has made the rules for eligibility and operations less stringent. The Small Business Act of 1996 notably contributed to the utility of S corporations. The original purpose of subchapter S was “to minimize the effect of federal income taxes on choices of the form of business operation,” but taxes continue to play an important role in choosing the appropriate entity in which to conduct business. This chapter provides an overview of the taxation of S corporations so the business adviser can determine whether the business is eligible to elect under subchapter S and, if so, the ramifications of that election.

Source Publication

Taxation for the General Practitioner

Source Editors/Authors

Richard V. D'Alessandro

Publication Date

1999

Taxation of S Corporations

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