Basics of the S-Corporation - 2 CE hrs - RIPSY-T-00024-24-S

The S-Corporation (S-Corp) is a popular business structure offering pass-through taxation and corporate liability protection. Its main draw is the potential to minimize self-employment taxes (FICA/Medicare) on owner distributions. This status is governed by strict IRS rules (IRC Subchapter S); failure to comply risks severe tax penalties. Key IRS Requirements for S-Status: Eligibility: Must be a domestic corporation with no more than 100 shareholders (all generally must be U.S. individuals or certain trusts). 🇺🇸 Stock: Must have only one class of stock (identical distribution rights). Election: Timely filing of Form 2553 with 100% shareholder consent. Core Tax Mechanics: S-Corps file Form 1120-S but generally pay no federal income tax. Income or losses flow through to owners' personal tax returns via Schedule K-1. Shareholder Basis must be tracked to determine the deductibility of losses and the taxability of distributions. The Main Audit Focus: Reasonable Compensation Rule: Shareholder-employees must receive a W-2 salary considered "reasonable" for their services. This salary is subject to FICA/Medicare tax. Benefit: Payments beyond the reasonable salary are tax-free distributions to the extent of the Accumulated Adjustments Account (AAA) and Shareholder Basis. The IRS scrutinizes low salaries combined with high distributions to prevent payroll tax evasion. Bottom Line: The S-Corp is a powerful tax tool, but continuous, strict adherence to these IRS basics, especially regarding compensation and eligibility, is mandatory.