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)