S-Corporation Tax Write Offs for Losses

By River Braun, J.D.

S-Corporation Tax Write Offs for Losses

By River Braun, J.D.

An S corporation, or S corp., is actually a tax status, rather than a type of corporation. Business entities that are registered as corporations or limited liability companies (LLCs) may elect S corporation status with the Internal Revenue Service for taxation purposes. This makes the business a disregarded entity for these purposes, which means it passes its profits and losses on directly to shareholders of the small corporation or members of the LLC. This status has various benefits to owners, depending on whether the company was profitable during the prior fiscal year.

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Disregarded Entity Basics and Filing Taxes

With standard corporate taxation, the corporation is taxed at the corporate level and the shareholders are for profits and distributions as well. An S corp. avoids this double impact by treating the company as a disregarded entity. In this way, the company is not taxed on profits—just the owners or shareholders. Owners and shareholders can also use corporate losses to protect earnings from other sources.

When it's time to file, the corporate representative fills out the U.S. Income Tax Return for an S Corporation (Form 1120S) by recording all profits and losses for the S corp. Standard deductions for its business activities can also be recorded, but these activities are not taxed. Instead, the taxes on net profits or protection for losses are passed on to corporate shareholders or LLC owners, called members. The S corporation is responsible for issuing the Partner's Share of Income, Deductions, Credits, etc. (Form 1065, Schedule K-1) to each shareholder or member.

Those individuals that hold ownership in an S corp. are responsible for claiming the profits or losses found on Form 1065, Schedule K-1 on their personal returns. In this way, these owners may record multiple sources of income. For any losses for the tax year, owners can use those losses to protect income from other sources.

Other Tax Benefits of S Corp. Status

Shareholders and owners of S corporations and other pass-through entities may claim a deduction based on the interest of the qualified business income (QBI). QBI is taxable income, gain, deduction, and loss from an S corporation in the U.S. The QBI deduction generally consists of 20 percent of the S corporation's QBI. This deduction can be treated in the same manner as an itemized deduction, but it is not necessary to itemize it. Restrictions apply, so be sure to consult with a tax professional before applying this deduction.

A key benefit to pass-through entities is the ability to carry forward or carry back losses associated with the S corporation. This enables members and shareholders to utilize the profits and losses to their best benefit over multiple years, not just the current year. S corporations have a variety of benefits—not just tax benefits. If you're ready to incorporate your business, talk with an experienced business attorney to determine the best business entity for you.

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