S Corporation
An S corporation is a pass-through entity that files Form 1120-S. Income, deductions, and credits flow through to shareholders' individual returns. Limited to 100 shareholders, one class of stock, and US individual/trust shareholders only.
Exam Tip
S corp: max 100 shareholders, one class of stock, US individuals only. Debt basis = direct loans only (unlike partnerships). Reasonable compensation required.
What is an S Corporation?
An S corporation elects pass-through taxation under Subchapter S, avoiding double taxation while providing liability protection.
S Corp Requirements
| Requirement | Detail |
|---|---|
| Max shareholders | 100 |
| Stock classes | One class only (voting rights may differ) |
| Eligible shareholders | US individuals, certain trusts, estates |
| Ineligible shareholders | Partnerships, corporations, nonresident aliens |
| Entity type | Domestic corporation |
S Corp vs. Partnership Basis
| Feature | S Corp Shareholder | Partner |
|---|---|---|
| Stock/ownership basis | Yes | Yes (outside basis) |
| Debt basis | Only direct loans to corp | Share of all partnership debt |
| Loss deduction | Limited to stock + debt basis | Limited to outside basis |
Key Tax Rules
| Rule | Detail |
|---|---|
| Reasonable compensation | Required for shareholder-employees |
| Distributions | Tax-free up to stock basis |
| Excess distributions | Capital gain |
| Built-in gains tax | May apply for C-to-S conversions |
Exam Alert
S corp shareholders get debt basis ONLY from direct loans to the corporation (not third-party loans). This differs from partnerships. Reasonable compensation is required -- IRS scrutinizes low salaries to avoid payroll tax.
Study This Term In
Related Terms
Qualified Business Income Deduction (Section 199A)
The QBI deduction allows eligible taxpayers to deduct up to 20% of qualified business income from pass-through entities (sole proprietorships, partnerships, S corporations). Phase-outs apply for specified service trades/businesses (SSTBs) above income thresholds.
Self-Employment Tax
Self-employment tax is the combined Social Security (12.4%) and Medicare (2.9%) tax that self-employed individuals pay on net earnings from self-employment, totaling 15.3%.
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