If you are setting up a new business or restructuring an existing one, you might consider electing to be taxed as an S Corporation, which means you are electing to have your entity taxed under Subchapter S of the federal tax code. Such entities will also be considered as an S corporation for California tax purposes.
Provided that the business qualifies, it may be beneficial from a tax perspective for an entity to be considered an S corporation as the business will be able to avoid federal double taxation because there is no corporate federal income tax on the profits of the company. All profits and losses are passed on to the entity’s shareholders.
Structure of an S Corporation
An S corporation must meet certain requirements and has certain benefits, including:
- An S corporation may not have more than 100 shareholders;
- An S corporation must have a separate bank account and maintain separate records;
- An S corporation’s management structure is dependent on which type of business it is considered under state law, such as a corporation, partnership or LLC; and
- The shareholders of the corporation are not liable for the entity’s losses. Creditors may seek out the corporation’s assets for payment.
S Corporation Tax Features
While federal income tax is not assessed against S corporations, it is subject to a 1.5 percent tax on its net income under California law. Also, under California law, S corporations are required to pay annually a $800 minimum franchise tax, which is allowed as an offset against income tax.
The shareholders of the S corporation, individually, must report their pro rata share of the entity’s income, deductions, and credit, as detailed on the Schedule K-1 (“Member’s Share of Income, Deductions, Credits, etc.”), which must be provided by the S corporation.
Filing Guidelines for S Corporations
An S corporation must file Form 100S (“California S Corporation Franchise or Income Tax Return”) if the entity is:
- Incorporated in California;
- Registered with the Secretary of State to do business in California;
- Doing business in the state; or
- Receiving California source income.
The return due date for Form 100S is the fifteenth day of the third month following the close of the taxable year. In addition, to calculate income subject to tax in California, S corporations that conduct business in or receive income out of California will use Schedule R.
A California S Corporation Tax Lawyer Can Answer Your Questions
If you are trying to determine how setting your business up as an S corporation would affect your bottom line and tax strategy, an attorney can help. Setting up the proper tax structure for your business is critical to its success.
The accomplished San Jose S corporation tax attorney at John D. Teter Law Offices can be reached at 408-866-1810. Our firm has helped many clients utilize the law for a business’ benefit. Call us today to set up your first appointment.