It may have made sense to start your small business as a C corporation, but now you’re getting hit with “double tax” each year—once at the corporate level and again on amounts distributed to you that are treated as taxable dividends.
Strategy: Elect S corporation status. Because there’s no corporate-level tax, you pay tax only once on business profits. This is often the best option for small business owners.
However, the deadline for the S corporation election is looming. Generally, you have until 2½ months after the end of your company’s tax year—March 15, 2016, for calendar-year corporations—to change the company’s status for its 2016 tax year.
With an S corporation, corporate income items, losses, deductions and credits pass through to shareholders for federal income tax purposes. The shareholders report the passed-through amounts on their personal tax returns and pay tax at individual. Thus, you avoid double taxation of corporate income. However, S corporations are still responsible for tax on certain built-in gains and passive income at the entity level.
To qualify for S corporation status, the corporation must meet these requirements:
- Be a domestic corporation
- Have only allowable types of shareholders including individuals, certain types of 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).
To make an S election for your company, submit Form 2553, Election by a Small Business Corporation, signed by all the shareholders.