What’s an S-Corporation?
Do you own or belong to an S Corporation? An S Corporation is simply a small business, sole proprietorship, or other corporation that has filed an election to be taxed differently than traditional corporations. Typically, the taxes incurred by larger corporations are paid by the corporation itself, using company funds. Businesses – especially small businesses – that are categorized as S Corporations file their taxes differently. Instead of paying the company’s taxes out of company funds, the tax responsibilities are split among the shareholders. In many cases, this election is a financial relief to the small business, reducing the burden on the company and allowing the business to reserve more funds for business operations.
Filing a Corporate Tax Return as an S Corporation
Filing an S Corporation tax return is similar to filing any other tax return. However, there are a few special details of which to be aware if you are filing on behalf of your company.
An S Corporation tax return may only be filed
- if the business has elected for S Corporation status
- if the IRS approved the election for the current tax year
- if the election remains in effect.
Also, if the corporation received a letter from the IRS, approving of the election, within less than 2 months before filing the S Corporation tax return, the company should contact the IRS to avoid any confusion. For this purpose,
the IRS may be reached by calling 1-800-829-4933
How Long Does the Election Remain in Effect
Every small business that is awarded the opportunity to file an S Corporation tax return with form 1120S should review the IRS rules regarding the duration of the election. Once a corporation is awarded the election (using form 2553), the election remains in effect until the business terminates the election or if the election is revoked. There are some automatic terminations every S Corporation should know about. The S Corporation election may be automatically terminated if:
- the corporation is no longer a small business corporation, as defined by the IRS. *See IRS code section 1361(b) for how the IRS defines small business
- the corporation earns more than 25% of its income from passive investments, rather than active business, for three consecutive years
- the shareholders own more than 50% of the company and agree to terminate the election
Also, if the corporation has terminated the election, a new election may be requested by filing form 2553 again.
When to File the Tax Return
S Corporations are required to file the return by the standard tax deadline. It is possible that questions over the election status or other concerns may delay a small business from filing the return on time. In these cases, eligible corporations that need a little extra time to get the return in order, may apply for a 6-month extension. If you find yourself in this situation, an extension may be requested using IRS Form 7004. Again, if you have questions about your small business’ election status or need to file an extension, be sure to follow-up by contacting the IRS directly.
Other Related Documents
Instructions for Form 1120S,