Tax Rules for S Corporations in the US
This video provides an overview of the tax rules for S corporations in the United States.
An S corporation is a business entity type that provides the limited liability of a corporation but is taxed as a flow-through entity (no double taxation like C corporations). Profits (or losses) of the S corporation flow through to shareholders and are taxed at the shareholder (but not corporate) level.
An S corporation must be organized in a U.S. state. After creating a corporation, shareholders must file Form 2553 with the IRS to elect for the company to be treated as an S corporation. Not all corporations be an S corporation, and there are requirements based on the type of corporation, the number of shareholders, and types of shareholders.
Income and deductions of an S corporation are allocated to an S corporation on a pro rata basis. In contrast to partnerships, special allocations (non pro rata) are not allowed. Distributions to shareholders are generally nontaxable to the extent the shareholder has basis, although distributions can be taxable if they exceed the shareholder's basis or if the distributions pertain to earnings and profits (E&P) accumulated by the corporation prior to its election to become an S corporation.
A shareholder's basis is increased by capital contributions, share purchases, and the shareholder's pro rata share of income items, while the shareholder's basis is decreased by nontaxable distributions to the shareholder and the shareholder's pro rata share of deductions and losses (although the shareholder's basis can never go below zero). In contrast to partnerships, a shareholder's basis is not increased when the S corporation borrows money (unless the shareholder loans money to the S corporation).
While S corporations are flow-through entities and are thus not subject to income tax, S corporations may be subject to taxes in certain situations.
0:00 Overview
0:33 What is an S corporation?
2:51 How to create an S corporation
3:40 Requirements to be an S corporation
8:01 Allocating income and deductions
11:19 Tax consequences of distributions
14:53 Calculating a shareholder's basis
17:13 Taxes on S corporations
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