Explain the tax effects that S corporation status has on shareholders.

Expert Solution

S Corporations are pass through entities and the shareholders receiving the appropriated income of the S corporation are taxed on the individual basis for the purpose of federal income tax. the shareholders would be eligible for 20% deduction from the share income of S corporation.

There is no self employment tax to be paid on this income by the shareholder but income if any received as salary or commission (i.e other than appropriated profits) would suffer self employment tax

A shareholder of S corporation is taxed on the allocated profit whether or not it is distributed and at the same time he is not taxed on distributions from the business, so long as those distributions do not exceed his cost basis in the S-corp.

S corporation being pass through entities have no liability to pay federal income taxes (except with regard to capital gains and passive income),but certain states may tax the S corporation on its own.

ekkarill92 answered 2 years ago

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