S Corp Tax Preparation for Houston Businesses
S-corporations are governed by their own set of rules during tax preparation time, so business owners frequently work with a tax preparation expert to ensure it’s done right. For example, S-corp owners must consider the following when preparing their taxes:
- S-corps are pass-through entities, so they do not pay taxes at the corporate level.
- S-corps have their own tax reporting requirements, including filing Form 1120-S and providing each shareholder with a Schedule K-1.
- In a small number of scenarios, S-corps may owe corporate-level taxes to the federal government.
- Corporations must elect to become an S-corp following formation, and this requires consent from all of the company’s shareholders. The timing of this election may have significant tax ramifications.
Each of these big-picture considerations comes with a long list of tax-related decisions that a reputable tax preparation expert can assist with.
How Tax Preparation Experts Can Help with S-corp Tax Preparation
S-corporations are a popular entity choice for small business owners because they provide major tax advantages. However, those advantages come with unique compliance and reporting requirements that include the following:
- Filing a Form 1120-S – Form 1120-S is the primary tax document submitted to the IRS annually. For most S-corps, the deadline is March 15th, though business owners may file for an extension that resets the deadline to September 15th. Note that this doesn’t extend the deadline for paying taxes – it only extends the tax filing deadline.
S-corps are required to report their income (gross receipts and other sources of income like selling assets) and their deductions on Form 1120-S. Deductions include wages and salaries, maintenance, rent, marketing, employee benefit programs, interest and depreciation. There is a lot of potential gray area when tabulating deductions, so it’s best done with expert tax prep guidance.
Business owners are also required to attach a Schedule K to their Form 1120-S, which details the allocation of all income, deductions and credits to each shareholder. This information must be corroborated on each shareholder’s Schedule K-1. - Providing Schedule K-1s to each shareholder – As a pass-through entity, S-corporations are required to file a Schedule K when filing a Form 1120-S. The information included on the Schedule K mirrors the information provided to each shareholder on their Schedule K-1. Because tax obligations are passed through to the individual, each shareholder requires this Schedule K-1 to accurately report their individual income taxes. Timely provision of all shareholder K-1s is required for S-corp owners. A tax preparation expert will ensure they are developed and provided on time.
- Identifying and calculating any federal tax obligations – Although S-corps are pass-through entities, they are required to fulfill certain federal tax obligations.
Employment taxes are the heaviest federal tax burden for most S-corps. They include FICA taxes – Social Security and Medicare, as well as FUTA taxes – Unemployment. You can think of this as the S-corp analog to payroll taxes paid by other entities.
Excise taxes are required by S-corps operating in certain industries or selling certain types of products. Communication services, fuel providers and tobacco products are examples of industries saddled with excise taxes.
Excess net passive income taxes are paid by S-corps that derive at least 25 percent of their gross receipts from passive income sources. Passive income includes gains from rent, royalties, dividends, interest and stock sales.
Built-in gain taxes are typically required by S-corps that spent considerable time as a C-corp first. Specifically, they’re paid out when an S-corp sells an asset that had appreciated during the entity’s time as a C-corp. This is applicable to all appreciated assets that are sold within five years of the entity conversion (from C-corp to S-corp).
Finally, S-corps that previously spent time as a C-corp may be required to remit LIFO recapture taxes. This is true if the S-corp used the Last In, First Out (LIFO) method to price its inventory during the last year of its C-corporation status. This tax may also be triggered if the C-corp transferred inventory to the S-corp in such a way that gains or losses were not fully realized.
As you can see, there are many scenarios where S-corps are obligated to remit federal taxes. However, it’s not always clear when these taxes are required, and they can be difficult for small business owners to calculate. As such, many choose to work with a business tax preparation expert to ensure all tax liabilities are addressed.
An S-corp tax preparation expert will ensure all of the above is addressed, including timely tax return filing, Schedule K-1 provision and additional tax prep for any federal tax obligations.
A Tax Preparation Professional Can Best Position S-corporations During Tax Time
Whether you’ve operated an S-corporation for several years or have recently formed an S-corp entity, a tax preparation expert can oversee tax calculations and filing for their business owner clients. For many S-corps, there are many moving parts that can complicate tax reporting and filing. For example, if your company has just elected to convert to an S-corporation, it may have retroactively applied taxes that will have to be accounted for.
This is just one example among many. The important point is this – if it’s important for your organization to realize the tax benefits provided to S-corporations, it’s important to get your taxes right. A tax preparation expert will ensure that’s the case for your company, so there are no expensive surprises when tax season rolls around.
