Small business owners may be familiar with S-Corporations and the tax advantages they offer. An S-Corporation is a type of company that distributes its profits and losses to its shareholders, who subsequently report them on their individual tax returns. By avoiding double taxation, S-Corporations have a significant benefit over C-Corporations. One query that comes up, though, is whether you need to submit an S-Corp election each year.
The quick response is no, you are not required to submit an S-Corp election each year. Once your S-Corp election has been submitted and approved, it is valid until you voluntarily renounce it or the IRS ends it. However, there are some situations in which you might need to modify your S-Corp election. You must submit a new S-Corp election to the IRS if, for instance, you add or remove shareholders, alter the proportion of ownership for current shareholders, or alter the kind of stock you issue.
There may be fines and consequences if your S-Corp election is not submitted on time. Normally, the S-Corp election filing deadline is March 15 of the year that the election is to become effective. However, you have 75 days from the date of incorporation to file the election if you have a recently created corporation. A late filing penalty of $195 per shareholder, per month, up to a maximum of 12 months, may be imposed if you miss the deadline. You can also be liable for back taxes and penalties if the IRS finds that your corporation was ineligible for S-Corp status for the whole tax year. Another tax advantage of S-Corporations is that they are not subject to federal income tax. Instead, the corporation’s profits and losses are transferred to the shareholders, who then declare them on their individual tax returns. Individual tax rates for shareholders, which may be lower than the corporation tax rate, are used to calculate their taxes. S-Corporations are nevertheless subject to some taxes, such as the Net Investment Income Tax on some types of income and payroll taxes on employee earnings.
It’s critical to take your company’s unique demands and objectives into account while picking between an S-Corporation and a C-Corporation. Larger, more sophisticated companies that normally operate as C-Corporations may profit from lower corporation tax rates as well as more flexible ownership and stock option policies. S-Corporations are typically smaller, closely held companies that may benefit from limited liability protection and pass-through taxation.
In conclusion, even though you are not required to file an S-Corp election each year, you might need to do so if your company undergoes a change. There may be fines and consequences if a filing is late. S-Corporations have tax advantages in that they don’t pay federal income tax and don’t face double taxation, but they are still subject to other taxes. A C-Corporation may be a better option for your firm depending on its unique needs and objectives.
An S corporation’s requirement for strict adherence to specific laws and regulations, such as limitations on the number of shareholders and the kinds of stock that may be issued, is one of its drawbacks. S corporations must also submit annual tax returns and could incur more expenses for administration than other kinds of company entities.
There are a number of justifications for choosing to create a S corporation. S firms are classified as pass-through businesses for tax purposes, which means that the company’s revenues and losses are distributed to the shareholders and reported on their individual tax returns. This is one of the key advantages of S corporations. The corporation itself does not pay federal income taxes on its profits, which might result in considerable tax savings. S corporations also provide stockholders with liability protection, much like a C corporation does, but with better tax status. Finally, because S corporations are seen as more reliable and trustworthy than other business structures, they are frequently more appealing to lenders and investors.