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Beat the S corp election deadline

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in Small Business Tax,Small Business Tax Deduction Strategies

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 income tax rates. 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:

  1. Be a domestic corporation
  2. Have only allowable shareholders including individuals, certain trusts and estates
  3. Have no more than 100 shareholders
  4. Have only one class of stock
  5. 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.

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