What Forms Do I Need to File for an S Corp?

By Jeff Franco J.D./M.A./M.B.A.

An incorporated business is automatically designated by the Internal Revenue Service as a C corporation for income tax purposes. However, certain smaller corporations can elect to be taxed as S corporations without forfeiting the liability protections that the corporate structure affords to shareholders. Making the initial election requires filing an IRS form. Once S corporation status is granted, the tax forms the corporation must file annually will change.

S Corporation Taxation

The benefit of electing to be treated as a federal S corporation is that the business is taxed much like a partnership rather than a C corporation. In a traditional corporation, the business is treated as a separate taxpayer apart from its shareholders, and the company is taxed on its business earnings. This leads to the widely publicized complaint of “double taxation” because the corporation pays taxes on its income, and then shareholders pay taxes on the remaining profits when the money is distributed as dividends. With a partnership, the income, deductions, credits and losses of the business “pass through” and are allocated among the partners. The profit or loss is reported on shareholders’ personal returns, eliminating double taxation.

IRS Form 2553

Before a corporation can take advantage of S corporation taxation, Form 2553 must be filed with the IRS. Numerous restrictions apply to the types of corporations that are eligible to make this election. For instance, the corporation may have no more than 100 shareholders; each shareholder must be an individual, estate or trust; and the corporation can issue only one class of stock, none of which can be held by nonresident aliens. All shareholders must consent to the election and sign Form 2553. If Form 2553 is filed within the first two months and 15 days of the corporation’s tax year, the election is effective for the entire tax year; otherwise, the corporation will continue to be taxed as a C corporation until the following tax year.

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IRS Form 1120S

Electing to be treated as an S corporation will require the corporation to file its annual tax return on Form 1120S instead of Form 1120. The 1120S is an informational return, and the corporation only pays tax on certain types of income, such as passive income and built-in gains. The form calculates the company’s total ordinary business income or loss, but it’s then allocated among the shareholders for reporting on their personal income tax returns. Just like Form 1120, the 1120S is due on the 15th day of the third month after the close of the tax year.

Schedule K-1

So that shareholders in an S corporation know how much to report on their personal tax returns, the IRS requires a Schedule K-1 to be prepared for each shareholder and attached to the 1120S. A copy of the K-1 is sent to each shareholder, showing the amount of taxable income that must be reported on the individual’s personal tax return. The K-1 form also reports the character of each tax item. For example, if the S corporation’s total income is comprised of bank interest, capital gains and dividends, the K-1 will report the shareholder’s allocation in each income category.

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Can You Fill Out a 2553 Before the Articles of Incorporation?


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Can a Sole Proprietor File as an S Corporation?

Understanding that a business structure affects more than just management is an important first step to selecting the right company type. Because a sole proprietorship provides an owner with the ability to operate under his own name, total responsibility remains with him. When it comes to the payment of taxes, knowing how to achieve the benefits of pass-through taxation without having to alter the business structure can be very important. An S corporation and a sole proprietorship both pass tax liability on to the owner or shareholders. However, because the business structures differ greatly, so do the filing processes.

Definition of a C-Corporation

Classification of a corporate entity as a C corporation rests entirely on whether it’s subject to the income tax rules in subchapter C of the Internal Revenue Code, or IRC. The C corporation designation solely relates to income tax, so states make no distinction when you create the entity. However, many state taxing authorities recognize the designation for state income tax purposes.

S Corporation Passive Income Restrictions

An S corporation is a corporation consisting of 100 or fewer shareholders that has a special tax designation granted by the IRS. While this designation offers the shareholders certain tax benefits, it requires the company to adhere to several restrictions and conditions. One of these restrictions involves how much passive income the business earns. It is important for an S corporation to closely monitor how much passive income it earns to ensure that it avoids any IRS penalties or tax repercussions.

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