S Corporation Term Paper

S Corporations

Term Paper

Tax Accounting

Table of Contents

Introduction – Page 3

Structure – Page 3

Eligibility – Page 4

Formation – Page 4

Stock Basis – Page 4

Salary Payments – Page 5

Termination – Page 6

Conclusion – Page 6

Bibliography – Page 7

Introduction

An S corporation (S-corp) is a business entity with the flow-through tax benefits of a partnership and the limited liability protection of a regular corporation. S corporations were introduced into the tax code by Congress in 1958 after a recommendation by President Dwight Eisenhower to create a corporation type that would appeal to small businesses and encourage small business creation. Today, the IRS claims that there are approximately two S corporations filing returns for every one regular C corporation (Parrish). S corporations are increasingly the entity of choice for fast growing small businesses. Small businesses are the cornerstone of the American economy, and S corporations are the cornerstone of America’s small business community (S-Corp Association of America). In this paper, we will explore the formation, structure, salaries, and a variety of tax issues associated with S corporations.

Structure

The S corporation gets its name from subchapter S of the Internal Revenue Code. In this section, it states that corporations may elect to pass through profits and losses to the shareholders so they may report it on their personal tax returns and be assessed tax at their individual rates. Thus, eliminating the double taxation on corporate income. S-corps are exempt from federal income tax with an exception to passive income and certain capital gains. Passive income is income from any activity involving the conduct of any trade or business that the taxpayer does not materially participate. Under Section 469(h), a taxpayer must be involved in the operations of the activity on a regular, continuous and substantial basis in order to “materially participate.” No more than 25% of gross...