Subchapter S corporations, also known as S corporations, are a type of business entity that offers certain tax advantages over traditional corporations (C corporations). Some of the key tax advantages of S corporations include:
Pass-through taxation: S corporations are considered "pass-through" entities, which means that the income and losses of the corporation are passed through to the shareholders and reported on their individual tax returns. This means that the corporation itself is not subject to corporate income tax, which can result in significant tax savings.
Flexibility in allocating income and losses: S corporation shareholders have more flexibility in allocating income and losses among themselves. This allows them to optimize their tax situation by allocating losses to shareholders who are in a higher tax bracket and income to shareholders who are in a lower tax bracket.
Avoidance of double taxation: With traditional C corporations, income is taxed at the corporate level and then again at the individual level when it is distributed as dividends. S corporations, on the other hand, are not subject to double taxation, as the income is only taxed at the individual level.
Lower self-employment taxes: Shareholders of S corporations who also work for the company may be able to pay lower self-employment taxes on their share of the company's income.
Eligibility for certain tax credits and deductions: S corporation shareholders may be eligible for certain tax credits and deductions that are not available to shareholders of C corporations.
However, it's also worth noting that S corporations are subject to certain restrictions, such as a limit on the number of shareholders and certain restrictions on the types of shareholders that the corporation can have. Additionally, S corporations may be subject to more scrutiny from the IRS, which can lead to additional compliance costs.