Are you deciding whether to make your business an S corporation for 2016? Here are tax considerations to review before the March 15 due date of the election.
Advantages and Disadvantages of Making an S Corporation Election
When you make an S election, you’re opting to have your business’s income or loss “passed through” to you and other shareholders. That means you’ll report the income or loss on your personal tax returns. This pass-through avoids the double taxation that can happen in regular corporations when income is first taxed at the corporate level and then taxed again as dividend income to the shareholders. In effect, S corporations provide the legal liability protection of a corporation, but have the tax characteristics of a partnership.
Other tax advantages include a certain amount of flexibility in compensating shareholder-employees, though you’ll need to understand the rules to avoid problems. In addition, as an S corporation shareholder, you can potentially deduct the company’s losses against other personal income. You may also have the potential for more charitable deductions, which are not limited to 10% of income as they are with regular corporations.
What’s the downside? Examples include the limitation that S corporations can have only one class of stock and are limited to 100 shareholders. Those shareholders cannot be partnerships, corporations, or nonresident foreigners. In addition, S corporations have a narrower range of tax-deductible fringe benefits available to employees.
If you’re considering an S corporation election for this year, keep in mind you have a deadline to meet. Corporations with a calendar year-end have until March 15, 2016, to file an election for the current tax year. If you’re just starting your business, your new corporation has until the 15th day of the third month after incorporation to make the election.