Did you file for a tax extension for your S-corporation last March? Guess what. September 15, the deadline for filing your taxes after an extension is almost here. You have been getting your stuff together for this, right?
S-corporations are kind of a cross between a partnership/LLC and a C-corporation, which is what most people think of when they see the term “corp.” S-corporations exist to avoid double-taxation on earned income. Instead of paying both corporate taxes and each member paying individual income taxes, the income of the S corporation “passes through” to the members.
When it comes to taxes, S-corporations and partnerships follow most of the same rules under the U.S. tax code. Taxes are due on March 15th, and extensions are due September 15th. Of course, there are exceptions, but it wouldn’t be U.S. tax law without some confusion thrown in.
The Definition of an S-Corporation
- It is a corporation, but with characteristics of a partnership.
- It can only be a domestic corporation.
- Shareholders are limited to individuals, certain trusts, and estates, and they may not be partnerships, corporations, or non-resident alien shareholders.
- The company can have no more than 100 shareholders and can have only one class of stock.
- It cannot be an ineligible corporation such as certain financial institutions, insurance companies, and domestic international sales corporations.
Other entities that can be shareholders include certain tax-exempt organizations (501(c)(3)). However, partnerships do not qualify as shareholders.
As noted above, S-corporations elect to pass corporate income, losses, deductions, and credits to the shareholders for federal tax purposes. Shareholders report the flow-through income and losses on their personal individual tax returns and taxes are assessed at the individual income rate.
The S-corporation avoids double taxation on corporate income but is still responsible for tax on some built-in gains and passive income at the entity level. S-corporations are formed by submitting Form 2553 Election by a Small Business Corporation. All shareholders must sign the form.
Benefits and Disadvantages of S-Corporations
One benefit of S-corporations has already been mentioned. It allows you to incorporate without being taxed at the entity level, thereby saving your business federal tax. When a business is just starting up, every little bit helps.
Other advantages:
- Limited liability protection is similar to an LLC or a C-corporation. Your liability is limited to the percentage you own of the company, and if the business is sued, your personal assets are safe.
- As a corporation, your business can sell stock to raise capital.
- The company has the benefit of perpetual existence. Even if a corporation owner dies or leaves, the company will continue. Stock and share transfers to individuals are made easier.
There are some disadvantages.
You need to be careful about setting “reasonable” compensation. The IRS places S-corporations under a microscope to ensure compensation is at fair market value. No trying to short yourself or others on compensation to increase corporate earnings. If you do, the IRS can and will reclassify any added corporate earnings as wages. Then you will owe Social Security and Medicare taxes on it.
The guidelines for profit and loss distribution to shareholders must be in proportion to their company stake. The S-corporation must also file several state and federal documents and pay fees to maintain the S-corporation status. Each state handles S-corporations differently.
Recent Changes in Tax Law Affecting S-Corporations
The Tax Cuts and Jobs Act passed in 2017 includes special distribution rules for eligible terminated S-corporations. The rules also changed to allow non-resident aliens to be potential current beneficiaries of electing small business trusts subject to the same charitable contribution rules as individuals.
Besides the TCJA, there have been changes in 20 sections of the Internal Revenue Code, which governs the taxation of S-corporations. In the past year to year and a half, there have been multiple cases decided and IRS guidance issued about these sections.
Changes include new limitations on business interest, new rules on qualified business income deductions, changes in charitable contributions and ESBTs, and changes in assignments of income.
Extended Filing Deadlines
Sometimes it isn't possible to get all the documentation together to file taxes on time. For this year, the original tax deadline for S-corporations was March 15, 2019, if you follow the calendar year. If you follow a fiscal year, your original return is due on the 15th day of the third month following the end of your fiscal year.
The IRS allows most taxable entities the ability to file for a six-month extension. This year the extended deadline is September 15, 2019, regardless of whether you use the calendar year or fiscal year.
The Required Documentation for S-Corporations
S-corporations file returns on Form 1120-S (provided your company’s request for S-corporation status is approved) and individual shareholders receiving tax distributions on Schedule K-1.
If you need a six-month extension, you needed to file Form 7004 (deep breath) Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns, if you follow the calendar year. The deadline to file for the extension was March 15. 2019 and you have until September 15, 2019, to file corporate returns for 2018.
Although S-corporations are not taxable entities, you are still required to keep records of all income and deductions, and report them to the IRS each year.
Gather and prepare the following as appropriate for your business:
- Form 1120-S: U.S. Income Tax Return for S-corporation
- Schedule K-1: Shareholder’s Share of Income, Deductions, Credits, etc.
- Form 940: Employer’s Annual Federal Unemployment Tax Return (FUTA)
- Form 941: Employer’s Quarterly Federal Tax Return
- Form 1099: Non-Employment Compensation
- Form W2: Wage and Tax Statement
Don’t forget the supporting documentation for each form or schedule as needed.
What If You Miss the Date?
Missing the date will likely result in a moderate financial penalty, perhaps an extra interest charge. The IRS recommends filing as soon as possible to avoid additional interest and penalties, especially if you owe taxes.
To recap: If you filed for a tax extension last March 15th for your S-corporation, the deadline to file is rapidly approaching. September 15th will be here before you know it. Make sure you have all your documentation ready to go, and get it filed and pay any taxes as soon as possible.
By the way, you don’t have to wait until September 15th, you know. If you have everything together now, why don’t you go ahead and get it over with?
