Per Diem Rates from the U.S. General Services Administration
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Rates are set by fiscal year, effective October 1 each year. Find current rates in the continental United States ("CONUS Rates").
What Is An S corporation?
S corporation shareholders enjoy the same limited liability protection as shareholders of a C corporation while being taxed as a partnership. (The "S" refers to the section of the Internal Revenue Code governing the tax treatment.)
Pass-Through Entity
A pass-through entity is not a tax-paying entity (see exceptions later). All items of income, deductions, credits, gains and losses are passed through the entity to its shareholders based on each shareholder's percentage ownership interest. Some states assess an annual minimum tax on S corporations even if the S corporation has zero net income.
Schedule K-1
Schedule K-1 is issued annually to each shareholder. The purpose of Schedule K-1 is to report to each shareholder his/her share of the corporation's income, deductions, credits, gains and losses. Each shareholder reports their share of K-1 items on their individual income tax return.
Exceptions When an S corporation May Be Liable for Taxes
The following three situations may result in an S corporation having to pay taxes:
- Built-In Gains:
- LIFO Recapture
- Passive Investment Income
Built-In Gain:
Property held by a C corporation may have appreciated in value at the time of converting to S status. This appreciated value is referred to as built-in gain. This gain on the date of conversion is reported as a built-in-gain if the property is sold or disposed of within 10 years of the conversion to S status.
LIFO Recapture
Two common inventory cost flow methods are used for valuing inventory:
- LIFO (last-in-first-out)
- FIFO (first-in-first-out).
LIFO results in a higher cost-of-cost-goods-sold (COGS) amount during times of inflation than does FIFO. A higher COGS results in a lower net income, which results in a lower income tax liability for a C corporation. The IRS, in recognition of this situation, takes back the tax benefit achieved under LIFO during times of inflation via LIFO recapture.
LIFO recapture is the excess of the ending inventory value computed under LIFO over the ending inventory value computed under FIFO. This excess amount is recaptured as income and taxed directly to the S corporation itself on Form 1120S and not its shareholders.
Passive Investment Income
An S corporation must pay tax on excessive passive investment income earned during a tax year when it operated as a C corporation. A tax results when passive investment income exceeds 25% of gross receipts (i.e. rents, royalties, dividends, interest, annuities, and proceeds from the sales or exchange of stock or other securities).
If all accumulated earnings and profits are distributed to shareholders before year-end, the corporation can avoid paying the tax. However, the shareholders will have a taxable dividend.
Electing S status immediately after Incorporation
A newly formed C corporation that immediately applies for and converts to S corporation status will not have to deal with built-in gains or any of the items previously mentioned. In other words, older C corporations that subsequently convert to S status are affected by the above three situations.
State Taxes and S corporations
Although an S corporation generally doesn't pay federal taxes, some states may assess a minimum tax on an S corporation. For example, Arizona has a $50 minimum annual tax on S corporations (check with your state).
Tax Year
An S corporation is generally required to use a calendar year (January 1 through December 31). IRS approval is needed to adopt a different tax year.