S Corporation Definition
 
S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. (See S Corporation Profits)
 
To qualify for S corporation status, the corporation must meet the following requirements:
 
Be a domestic corporation
Have only allowable shareholders (i.e. may be individuals, certain trusts, and estates and may not be partnerships, corporations or non-resident alien shareholders)
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).
 
S corporations are required to file IRS form 2553 when it elects to be classified as an S corporation. IRS form 1120S must be filed to report income, gains, losses, deductions and credits for any tax year covered by that election. IRS Schedule K form has to be filed to report information regarding income, deductions, credits, and other items that pass through to the corporation’s shareholders. The IRS Schedule K-1 form provides information about the shareholder’s shares of the income from the corporation.
 
Review all of the following line items from the IRS form 1120S:
 
Gross Receipt or Sales – The total gross income the S Corporation is claiming before any allowable expense deductions.
Ordinary Business Income – The total income the S Corporation profited after allowable expense deductions.
Compensation of Officers – The income paid to an employee/shareholder of the S Corporation.
NOTE When the participant is a shareholder for the corporation, this income is considered wages for the participant and must be reviewed further for correct budgeting requirements. (See Wages and Salaries)