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.
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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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