Do you operate your small business as a C corporation? It might have made sense to start out that way, but now you’re getting hit with “double tax”—once on the corporate level and once personally when the company pays you.
Strategy: Elect to convert to S corporation status. Because there’s no corporate-level tax, you pay tax only once. Frequently, this is the best option for small business owners.
But the deadline for the election is fast approaching. Generally, you have until 2½ months after the close of the tax year—March 15, 2014, for calendar-year corporations—to change your status for 2014. The IRS recently approved certain late filing exceptions, but these are few and far between. (IRS Revenue Procedure 2013-30)
Here’s the whole story: With an S corp, items of corporate income, losses, deductions and credits pass through to shareholders for federal tax purposes. The shareholders report the flow-through income and losses on their personal tax returns and pay tax at their individual. This allows you to avoid double taxation of corporate income. However, S corps are still responsible for tax on certain built-in gains and passive income at the entity level.
To qualify for S corp status, the corporation must meet the following requirements:
- Be a domestic corporation
- Have only allowable shareholders including individuals, certain trusts and estates
- Have no more than 100 shareholders
- Have only one class of stock
- Not be an ineligible corporation (i.e., certain financial institutions, insurance companies, and domestic international sales corporations).
The corporation must submit Form 2553, Election by a Small Business Corporation, signed by all the shareholders.