Updated July 24, 2015
What is an S Corp Chicago Illinois
Form 1120 and How to S Corp
Form 1120 s is the U.S. Income Tax Return for an s corporation. An s corporation is a corporation that makes a valid election to be taxed under Subchapter S of Chapter 1 of the IRS Code. In general, S corporations do not pay any federal income taxes. Instead, the corporation’s income or losses are divided among and passed through to its shareholders. The shareholders must then report the income or loss on their own individual income tax returns.
S corporations are merely corporations that elect to pass corporate income, losses, deductions, and credit through to their shareholders for federal tax purposes. S status combines the legal environment of C corporations with U.S. federal income taxation similar to that of partnerships.
Like a C corporation, an S corporation is generally a corporation under the laws of the state in which the entity was organized. For federal income tax purposes, however, taxation of S corporations resembles that of partnerships. As with partnerships, the income, deductions, and tax credits of an S corporation flow through to shareholders annually, regardless of whether distributions are made. Thus, income is taxed at the shareholder level and not at the corporate level. Payments to S shareholders by the corporation are distributed tax-free to the extent that the distributed earnings were not previously taxed. Also, certain corporate penalty taxes (e.g., accumulated earnings tax, personal holding company tax) and the alternative minimum tax do not apply to an S corporation.
Qualification for S corporation status
In order to make an election to be treated as an S corporation, the following requirements must be met:
- Must be an eligible entity such as a domestic corporation, or a limited liability company which has elected to be taxed as a corporation.
- Must have only one class of stock.
- Must not have more than 100 shareholders.
- Shareholders must be U.S. citizens or residents, and must be natural persons, so corporate shareholders and partnerships are generally excluded. However, certain trusts, estates, and tax-exempt corporations, notably 501c3 corporations, are permitted to be shareholders.
- Profits and losses must be allocated to shareholders proportionately to each one’s interest in the business.
The proper completion of Form 1120 S and the proper accounting for an S Corporation is not an easy task. Protecting the owners of an s corp takes years of experience and education. Don’t try to do this alone.
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Chris Amundson is the President of Accounting Solutions Ltd., a full service public accounting firm of Certified Public Accountants and Enrolled Agents handling the bookkeeping, accounting, tax preparation, and audit representation needs of Businesses, Estates, Trusts, and Upper Income Individuals.