Shareholders of S corporations report the flow-through of income and losses on their personal tax returns. This allows S corporations to avoid double taxation on the corporate income. An S corp is a type of corporation that provides its owners with liability protection and tax advantages.
Filing for S Corporation Status
To file for S corp status, your business must first be incorporated as a regular C corporation or have filed for LLC status. You must examine the following things before founding a S corporation:
- Is a S corporation the best option for your company?
- S corporation limitations.
- Why is an LLC the ideal structure for the S corporation tax status?
S corp status is a tax designation—you can’t incorporate as an S corp. For state taxes, every state has its own laws and regulations regarding S Corp taxation. Some states require S Corps to pay a state income tax.
Tax Treatment of S Corps
As an S Corp you elect to be taxed under Subchapter S of Chapter 1 of the IRS’s Internal Revenue Code. This means that when the business makes money, it goes directly to the shareholders. The shareholders then have to file this income on their individual personal income tax returns.
Utah’s Stance on S Corp Tax
Does Utah have an S corp tax?
For state taxes, every state has its own laws and regulations regarding S Corp taxation, including Utah. It’s important to check with state-specific requirements and regulations if you are considering electing your company as an S Corp in Utah or any other state.
Avoiding Double Taxation
Double taxation refers to how income earned by a regular corporation is technically taxed twice: once when the corporation earns income, and again when it distributes dividends to its owners (who then pay taxes on those dividends). S corps avoid this by allowing income to pass through directly to their business owners, as reported on a Schedule K-1.
C-Corporations Vs. S Corporations
However, small C-Corporations often don’t pay dividends, and their shareholders are often corporate employees who receive salaries and bonuses, which are deductible by the corporation.