Common Mistakes In Filing Taxes For An S-Corporation

S Corporation tax liability differs from that of a standard Corporation in that corporate income, losses, deductions and credits are passed through to the shareholders of the corporation for federal income tax purposes. Shareholder owners of S Corporations generally report the flow-through of income and losses on personal tax returns and are assessed federal income taxes at the individual income tax rates. This allows small businesses that are S Corporations to avoid double taxation on corporate income.

S Corporations are generally responsible for taxes on certain built in games and passive income. Therefore, if your small business is registered as an S Corporation, it is important to understand how to properly file your income taxes to avoid costly penalties and fines or simply paying too much income tax.

Late S Corporation Elections

One of the biggest mistakes small business owners make with an S Corporation when it's time for taxes is the late election of becoming an S Corporation S. You must make the election to become an S Corporation early in the year, and it is generally a good idea to always make the election before the start of the next year so that it is effective. Regardless, you should always ensure that you make your election either before the New Year starts or within 75 days after the start of the New Year.

If your business uses a standard tax year which begins on January 1, then you must make your S Corporation election by March 15. If you start a new business at another point during the year, the 75 day time limit starts from the day that you begin business operations. However, if you wish to make a late S Corporation election there are ways for you to do so. However, you would need to see a professional certified public accounting in order to do this.

Shareholder Employee Payroll Issues

When your business is approved as an S Corporation by the Internal Revenue Service (IRS), the IRS will send your business an approval letter stating such. You will find that the letter contains some very direct wording that warns you to pay reasonable compensation to shareholder employees.

However despite the IRS’s warning, many S Corporations tend to forget to make adequate payroll preparations for shareholder employees. Many times, shareholder employees are not issued regular paychecks or do not make regular tax deposits for the shareholder employee earnings. Furthermore, many S Corporations do not issue W-2s for shareholder employees, and this can prove to be a critical mistake when it comes time to file your income tax returns. In short, if you're the an owner of an S Corporation business, you should pay yourself the same way that you pay your other employees,

Poor Credit Financing Reporting

Many S Corporations obtain credit lines and loans from banks; furthermore, sometimes the loans are made directly in the name of the S Corporation business. However, for income tax purposes this is generally not a good idea. In order to obtain the biggest tax return savings, you should borrow money directly from the bank yourself and then provide a loan to your S Corporation. Because S Corporation tax liabilities and credits are passed through to you as a shareholder, you should make sure that any basis or interests payments associated with a loan for your business are also passed through to you. This is one of the most common corporation tax mistakes and often results in shareholder employees paying more personal income taxes than they should.

Other Potential Problems

If you're S Corporation was formerly a standard C Corporation, there are also many other types of tax liabilities that may be hard to quickly recognize and discern; therefore, it is important that you always seek the services of a qualified certified public accountant to help you with corporate income tax returns.

While, in theory, S Corporations do not actually pay a corporate income tax, inadequate preparation and reporting and will often lead to your S Corporation status being revoked and corporate profits being taxed at the standard rate of 35% of profits. Therefore, you can see how properly filing your income tax returns can help you maintain your status as an S Corporation and avoid many types of income tax liability.


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