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Beat S corporation election deadline

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in Small Business Tax,Small Business Tax Deduction Strategies

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 income tax rates. 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.

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