by Nellie Akalp
Your LLC or corporation could receive better tax benefits by electing to file as an S Corp. However, with the March 15, 2019 deadline quickly approaching, if you want to be taxed as an S Corp for the 2019 tax year, here’s what you need to know.
S Corp 101
S Corps choose to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S Corps then report the income and losses on their personal tax returns, so they’re taxed at their individual income tax rates. You would elect the S Corp structure in order to avoid double taxation on the corporate income.
To qualify for S Corp status, your business must meet the following requirements:
- Be a domestic corporation
- Have only allowable shareholders
- May be individuals, certain trusts, and estates and
- May not be partnerships, corporations or non-resident alien shareholders
- Have no more than 100 shareholders
- Have only one class of stock
Because the S Corp isn’t a legal business entity type, just a special election for tax purposes, an S Corp still offers you personal protection from liabilities of debt or lawsuits.
S Corps have some other advantages, such as:
- They are only required to file once a year
- They are not subject to the double taxation of income (once as corporate income and once as dividends)
- They can sell shares of stock, and
- They have perpetual existence, meaning the business continues to exist even if the owner leaves or dies.
The expenses and paperwork are the same as corporations, such as filing deadlines and expenses related to incorporating and annual fees. You should also consider the limitations on shareholders and stock. Since S Corps are allowed to issue only one class of stock and are limited to 100 shareholders who must be either citizens or permanent residents of the U.S., it may limit your ability to raise capital for the business.
Be forewarned, S Corps tend to attract the attention of the IRS, especially when it comes to salaries and dividend payments to shareholders. If you make any mistakes regarding the filing requirements, you could lose the status of being an S Corp.
March 15, 2019 is the deadline to file IRS Form 2553 with the IRS to elect S Corporation status for this tax year and future tax years. If you don’t make the March 15 deadline, your business will remain being taxed as a C Corp for the current tax year, and then your S Corp election will be effective for next tax year.
It is possible to file an extension for S Corp status (IRS Form 7004), but that doesn’t extend shareholders tax deadline which remains April 15. Once the S Corp form has been elected, your company must continue to meet ongoing filing requirements, such as:
- Reporting all financial activity on Form 1120S and attaching a Schedule K-1 for each shareholder
- Withholding federal income tax, Social Security and Medicare taxes from employees’ paychecks (if the company has employees)
- Filing IRS Form 941 each quarter to report these withholdings. The form is due four times a year: January 31, April 30, July 31 and October 31.
- Filing a Federal Unemployment Tax Return each year using IRS Form 940
Be sure not to miss any filing dates, or you’ll receive a hefty penalty. You could get a pass on paying the penalties if you can show the IRS the failure to file on time was due to a “reasonable cause.” Merely, a lack of funds is not a reasonable cause for failure to file or pay on time. However, the reasons for the lack of funds may be okay.
According to the IRS, reasonable cause is based on all the facts and circumstances in the company’s situation. If your company used all “ordinary business care and prudence” to meet your federal tax obligations, but were unable to do so, this will be considered reasonable cause. Situations such as fire, casualty, natural disasters, the inability to obtain records or death, serious illness, or incapacitation of the taxpayer or a member of the taxpayer’s immediate family would meet the criteria.
Talk to your accountant to see if the S Corp election is a smart choice for your business and then let CorpNet take care of the filing for you.
Nellie Akalp is a passionate entrepreneur, business expert, professional speaker, author, and mother of four. She is the Founder and CEO of CorpNet.com, a trusted resource and service provider for business incorporation, LLC filings, and corporate compliance services in all 50 states. Nellie and her team recently launched a partner program for legal, tax and business professionals to help them streamline the business incorporation and compliance process for their clients.