LUTZ BUSINESS INSIGHTS
managing s-corp entities to maximize tax benefits
austin sabaliauskas, senior accountant
Lower tax obligation is one of the many advantages of establishing a business as an S-Corporation. Also known as an S-Corp, this business entity is taxed under the Subchapter S of the Internal Revenue Code. An S-Corp allows shareholders to report income and loss as personal income and pay taxes at their standard tax rates. Primarily, S-Corps help owners to avoid double taxation.
As legal business entities, S-Corporations are governed by state corporation laws but must observe numerous internal formalities and practices. Strict adherence to these rules is crucial to harnessing the tax advantages. Here are a few key insights to help you maximize tax benefits when managing an S-Corporation.
Proper Book and Record-Keeping
Proper bookkeeping is at the heart of a successful S-Corporation. User-friendly accounting solutions such as QuickBooks allow you to track your expenses and income, organize, and streamline your financials. You can even automate repetitive tasks while maintaining a high degree of accuracy.
Keeping electronic financial records helps users find and store documents with ease. Better yet, it allows you to share those documents with relevant parties easily. That could include your CPA during tax season, creditors when you need an additional cash injection or investors for accountability.
QuickBooks uses the chart of accounts to classify company accounts for your convenience. It means you can generate financial statements in minutes whenever you need them. Digital accounting helps you to comply with the strict federal laws relating to S-Corporations.
When properly applied, an S-Corporation structure lowers the self-employment tax. But this requires S-Corp owners to draw reasonable compensation from the business. Unreasonable income division may be construed as a tax avoidance measure, drawing the eye of the IRS.
S-Corps have the benefit of splitting their business income into two components – salary and distribution. The owner’s salary is taxable, while distributions are not. Distributions should be allocated based on the ownership percentage. Your payroll must comply with these requirements to lower tax obligations.
In addition, S-Corporations do not pay tax at the entity level and pass through the corporate income, credits, loss, and deductions to shareholders. Therefore, S-Corp owners should report income and losses from the business on their personal tax returns.
Maintain Active S Status
An S-Corporation’s tax privileges are tied to Subchapter S of the Internal Revenue Code. The business can only reap these benefits if it meets the set IRS requirements. To qualify for S Status, a company must:
- be incorporated within the United States,
- have only one class of stock, and
- have 100 or fewer shareholders.
The shareholders of an S-Corporation must be US citizens or US residents. Select estates, trusts, or tax-exempt organizations are eligible as shareholders. Corporations and partnerships don’t qualify as shareholders. Some corporations in the financial and insurance sectors are forbidden S-Corp status and, therefore, not permitted as shareholders.
Cultivate Professional Relationships
S-corporations are governed by numerous protocols by which they must abide to maintain their S status. Some protocols include scheduling shareholder and directors’ meetings and taking minutes, as well as formalizing by-laws. They also have extensive record-keeping and legal requirements.
Due to the strict set of rules, S-Corps require a range of professional services. Hiring a qualified accountant can help them keep the books and reconcile their accounts. Attorneys are necessary to offer legal advice when entering into a new business venture or conducting various transactions. They also may need a line of credit with various creditors to meet their growing business needs and to ensure there is adequate cash flow for daily operations. Therefore, S-Corps must cultivate professional relationships with their CPA, attorneys, bankers, and creditors. Such a move is critical not only for smooth operations but also for their survival.
In summary, the tax privileges and exemptions are among the most alluring reasons for creating an S-Corporation. While attractive, this business designation is subject to compliance with various protocols set by the IRS. Any deviation from these requirements may lead to the loss of the coveted S Status and accompanying tax benefits. Working with a qualified accounting service provider like Lutz can help S-Corporations maximize their tax benefits and compliance.
ABOUT THE AUTHOR
AUSTIN SABALIAUSKAS + SENIOR ACCOUNTANT
Austin Sabaliauskas is a Senior Accountant at Lutz with over three years of experience in taxation. He specializes in providing tax consulting and compliance services for individuals and businesses with a focus on the real estate industry.
AREAS OF FOCUS
- Real Estate Industry
AFFILIATIONS AND CREDENTIALS
- Certified Public Accountant
- Master of Accounting, University of Nebraska, Omaha, NE
- BSBA in Accounting, University of Nebraska, Lincoln, NE
- Malmberg Foundation, Board Member
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