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Advantages of an S Corp

Electing to be taxed as an S corp can bring big tax savings for both new and existing business owners. From no corporate tax to reducible tax gains, this type of entity offers many appealing tax benefits that can increase profitability for companies by reducing taxes. Here are some of the many tax advantages of S corps:

Only Pay Taxes Once

With an S corp, instead of being taxed at the corporate level, profits are distributed to shareholders. The shareholders then report it on their personal income tax returns and pay tax on it individually. This process avoids the double taxation issue of a C corp and let’s face it, paying taxes once is more than enough.

Benefits of Flow-Through Taxation

Because profits and losses are passed through to shareholders, they can use business losses to offset other income on their personal tax returns. This is a huge advantage for startups with limited resources.

Income-Splitting

Business owners can split up how they get paid to maximize personal tax savings. They can initially take a reduced salary that’s subject to both income and payroll taxes and then take another cut as a profit distribution. They are only required to pay income tax on the distribution, legally shielding a chunk of their income from tax liabilities.

Transfer of Ownership Won’t Cost You

Transferring interests in an S corp won’t have adverse tax consequences. The accounting rules are also much easier to deal with than with other types of entities.


Disadvantages of an S Corp

Taxes by Calendar Year

Rather than going by a fiscal year, companies operating as S corps must adhere to a calendar year as its tax year

The IRS is Watching

The IRS carefully analyzes the amounts distributed to shareholders as either salary or dividends. At times, amounts are characterized one way or the other. If wages become dividends for tax purposes this will cost the corporation a deduction for compensation paid. Or, if dividends become wages the corporation will be liable for additional employment taxes.

Fringe Benefits Are Taxable

Fringe benefits are typically taxable as compensation to employees who are also shareholders and own more than two percent of the company.