An S-Corp is a federal income tax designation that allows individual shareholders, rather than the corporation, to pay income tax. Like many states, Florida recognizes the S-Corp elections that corporations make with the Internal Revenue Service. The S-Corp election is very advantageous for individual shareholders because Florida does not assess an individual income tax. Election as an S-Corp allows the corporation to avoid double taxation because normally shareholders pay income tax on dividends figured on after-tax earnings of the corporation.
S-Corp Election Requirements
S-Corp elections are generally made by traditional corporations; other business entities such as limited liability companies, or LLCs, and partnerships already avoid double taxation. First, the company must organize as a corporation in Florida by filing articles of incorporation. Not all corporations qualify to make the S-Corp tax election -- the IRS allows only small businesses with no more than 100 shareholders comprised of individuals who are not nonresident aliens; estates; and certain trusts to make the election. The corporation may have only one class of stock, so every outstanding share of stock has the same rights and ownership value attached to it. Then the corporation must file IRS Form 2553. Once the IRS reviews the application on Form 2553, it will issue a Notice of Acceptance. A copy of that notice must be sent to the Florida Department of Revenue to confirm the effective date of the election.
Florida Corporate Tax
With the exception of certain types of passive income and built-in gains, businesses that have elected S-Corp tax status don’t pay income tax on earnings like traditional corporations do. Instead, each shareholder receives a Schedule K-1 from the corporation that indicates their respective share of business earnings and deductions to report on their personal federal tax returns. For corporations conducting business in Florida that would otherwise owe state income tax if no S-Corp election was made, Florida adopts the federal rules and doesn’t require a corporate tax return or income tax payment. The real benefit of operating in Florida, however, is that the state doesn’t impose any income tax on residents, so when shareholders of an S-Corp receive their K-1s, they are not required to pay taxes to Florida as they would in the majority of states that do tax individual incomes.
When S-Corp Pays Tax
Corporations that don't make the S-Corp election in the same year of corporate formation, may be taxed as a traditional C-Corp before the S-Corp election went into effect. It may be responsible for paying tax on built-in gains, such as capital gains, and passive income like dividends and interest. This direct taxation on the S-Corp only occurs if these types of income relate to tax years in which the business was taxed as a C-Corp. For federal tax purposes, the taxable amount of this income will be reported on the federal corporate tax Form 1120S and, in such a case, Florida will also assess a corporate tax, which as of 2012 is imposed at the rate of 5.5 percent on taxable income, less the applicable state exemption.
Read More: Tax Consequences of Converting a C-Corp to an S-Corp
Florida Annual Report
For all non-tax purposes, your S-Corp election doesn’t alter the corporate entity you created. All corporations formed in Florida or that have authority to operate in the state must file an annual report with the Florida Secretary of State by May 1 of each year, regardless of whether the corporation has elected S-Corp tax status.The annual report must be accompanied by the applicable fee.
- Florida Small Business Institute: Internal Revenue Code Sec. 1361 – S Corporation Defined
- S Corporation Taxes: Worst Case Scenarios For Small Business Corporations
- Florida Department of Revenue: Form F-1120 Instructions
- Florida Department of State: Annual Report Overview (Part I) and Step-By-Step Filing Instructions (Part II)
Jeff Franco's professional writing career began in 2010. With expertise in federal taxation, law and accounting, he has published articles in various online publications. Franco holds a Master of Business Administration in accounting and a Master of Science in taxation from Fordham University. He also holds a Juris Doctor from Brooklyn Law School.