1099-S to use as start-up capital for your business. Tax Effect : The primary advantage of using an S corporation is its single level of taxation. The S corporation’s earnings are taxed to its shareholders based on the number of shares of stock they own. Similarly, losses incurred by the S corporation pass through to its shareholders. A shareholder's stock basis increases for his or her share of earnings retained in the business and decreases by losses and distributions passed through to the shareholder. However, distributions made by an S corporation are nontaxable to the shareholder’s and reduce the shareholders basis in their stock (Kieso, Kimmel, & Weygandt, 2015.) When corporations look at their corporate income, losses, deductions, and credits, an S corporation should be considered, as all of the items mentioned pass through to the shareholder for federal tax purposes (Anderson, Pope, & Rupert, 2016.) Therefore, the corporation’s income is exempt from the corporate income tax. Earnings can look good on paper, however, you need to consider your after tax flow. You will need to deduct depreciation from your operating income, calculate your tax, income after tax, and then add depreciation, as depreciation is not an actual cash outflow. Conclusion Economic Impact: Personal Returns : Bob, you have estimated you might make $300,000 in taxable income. Therefore, based on you and your daughter’s stock basis, this would be distributed accordingly to each of your individual basis’. However, distributions would decrease your shareholder basis, and these distributions would be taxed on your individual tax return as ordinary income. The IRS scrutinizes shareholder’s returns in order to ensure that they 8 | P a g e
Final Project are in fact receiving a comparable salary due to their service in the business, and that the shareholder, is not trying to use distributions as a form of salary. If you were to have a loss the first year, but plan to have substantial profits the next year, then both you and your daughter may deduct your share of the loss to the extent of your stock basis. If the stock basis did not cover the entire loss, then this situation would leave a loss carryover to the next year. If there are not substantial profits in the next year, then it would be in your and your daughter’s best interest, as well as for their business to make an additional investment to absorb the loss carryover (Anderson, Pope, & Rupert, 2016.) If you and your daughter had filed an LLC or a partnership, the income or loss would pass through the business to your individual returns, and could be deducted from other personal income that you both may have. However, if you had chosen to operate the business as a C corporation, then both you and your daughter would not carry income or losses through to your personal returns, as it belongs to the corporation.
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- Winter '15
- Taxation in the United States, S corporation