S Corporation Taxation
An S corporation is a pass-through entity that elects S status under Subchapter S, passing income, losses, and credits through to shareholders while generally avoiding entity-level tax.
Explanation
S corporations file Form 1120-S and issue K-1s to shareholders. To qualify, the entity must have no more than 100 shareholders, only eligible shareholders (individuals, certain trusts, estates — no partnerships or C corps), one class of stock, and be a domestic corporation. Shareholder basis consists of stock basis and debt basis (only direct loans from the shareholder). Distributions are tax-free to the extent of the accumulated adjustments account (AAA) and stock basis.
Key Points
- •Eligibility: ≤100 shareholders, one class of stock, eligible shareholder types only
- •Shareholder loss deductions limited to stock basis plus direct debt basis
- •Distributions tax-free to extent of AAA and stock basis
Exam Tip
Unlike partnerships, S corporation shareholders only get debt basis from direct loans to the corporation — not from entity-level borrowing or guarantees.
Frequently Asked Questions
Related Topics
Corporate Taxation
Corporate taxation covers the tax rules for C corporations, which are taxed as separate entities at a flat 21% federal rate under current law.
Basis Calculations
Basis is the amount of a taxpayer's investment in an asset for tax purposes, used to determine gain or loss on disposition and depreciation deductions.
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