Question

From tax and nontax perspectives, what are the advantages and disadvantages of S corporation status versus regular C corporation status?

Answer 1

S corps are taxed once, and C corps are taxed twice this is according to layman's terms

At the federal level, C corporations are first taxed on any and all the profits. These federally taxed profits are reported on the corporation’s federal income tax return. Once these profits have been taxed, the after-tax profits can then be distributed to shareholders of the entity or corporation.

At the federal level, C corporations are first taxed on any and all profits. These federally taxed profits are reported on the corporation’s federal income tax return. Once these profits have been taxed, the after-tax profits can then be distributed to shareholders.

EXAMPLE

• C corp taxation: let us consider that a business is registered as a C corp. Under the new 2018 tax reform bill, the corporate tax rate is now fixed at 21%. If a corporation earns $100,000 in profit, it will first be taxed at 21%, resulting in $79,000 after federal taxes. This amount could then be distributed to shareholders. If it’s distributed entirely to a single shareholder and taxed at a rate of 22% of the amount, that taxpayer would owe $17,380 in taxes. Their net total payout would be $61,620.

S corporations are fundamentally different. From a tax perspective, an S corp is treated more like a sole proprietorship or a partnership than a corporation. Rather than being subject to corporate tax, any and all S corp profits are “passed through” the corporation and on to the individual shareholders. These profits are only subject to tax on the individual shareholders’ tax returns. This so-called “pass-through income” is a popular feature of the S corp form of incorporation.

EXAMPLE

• S corp taxation: Now, consider what this would look like for an S corp. Imagine that a full $100,000 in corporate profits are passed through the S corp an on to a single shareholder. That shareholder is then taxed on their personal income taxes at a rate of 24%. This equates to $24,000 in federal income taxes, resulting in a new payout of $76,000 as opposed to the $61,620 mentioned above. That’s a difference of $14,380.