S Corporations and Cooperatives
S Corporations and CooperativesThe S Corporation was created in 1958. This was an initiative for investors, giving them access to the corporate form of doing business without incurring two levels of tax. The popularity, however, was not always there. As tax codes changed, so did the interest in them. The S Corporation has gained most of its popularity in 1986, when the rules for C Corporations became less attractive to shareholders. Not every business can qualify for this status, they must first meet the following requirements.
The business must first qualify as a “small business corporation”. This can be further defined as a domestic corporation that has 75 or fewer eligible shareholders, is an eligible corporation and has only one class of stock. The shareholders must meet certain requirements, stocks owned by a husband and wife are treated as one, but once they are separated, than the stock will be counted as two. This plays an important factor in the rule that stocks may never exceed 75 in quantity. The individual must be a US citizen or a legal resident alien, to prevent intentional violations of this, S Corporations can restrict share transfer through buy-sell agreements and first-refusal rights.
The most attractive feature of an S Corporation is that the entity itself is not taxed. Shareholders are the only ones taxed. There are exceptions to this rule, however, the vast majority of the S Corporations never encounter such situations. The S Corporations generally compute net income and gains, as well as losses, as that of partnerships. Most decisions used to determine the amount of income are made at the corporate level rather than by shareholders.
Those shareholders working for an S Corporation, qualify as employees. The corporation can deduct salaries, as well as payroll taxes, paid to and on behalf of these individuals. No self-employment income passes from an S Corporation to its shareholders. Salaries are the only items subject to employment taxes. S Corporations are sometimes tempted to under compensate employees to avoid Social Security and other payroll taxes.
S Corporations are rarely subject to income tax, they must compute their taxable income like individual taxpayers. The gross income of an S Corporation shareholder includes his or her proportionate share of the corporation’s gross income. Once the corporation identifies and measures the relevant items of income, deduction and credit, these items are passed through to shareholders to be reported on their own returns.
Each shareholder’s share of net losses may not exceed his or her basis in the corporation. The shareholder’s basis is generally his or her investment in the corporation plus any undistributed accumulated income. Any losses exceeding the shareholder’s basis may be carried forward indefinitely; to be used when the shareholder’s basis is increased. When basis is insufficient and there is more than one item that...
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