A small business with no more than 100 shareholders can choose to be recognized as an S corporation. Businesses that elect S-corp status do so primarily for the tax benefit, which allows for the income of the business to be passed through to the shareholders without the business paying any taxes. Shareholders then pay the corporation's taxes based on their pro-rata share of the business.
How to Calculate Taxable Income for an S-Corp
Elect S corporation status. To take advantage of the tax benefits, you must file Form 2553 with the IRS.
Determine profits, losses, and deductions. Though an S-corp itself does not pay taxes on its income, it must still calculate its taxable income, as that information is necessary for the shareholders to determine their tax obligations. An S-corp calculates taxable income in the same way a partnership calculates income. The taxable income of an S-corp is determined by subtracting all losses and deductions from the business's income.
Reduce tax liabilities for the shareholders. To lower the tax liabilities of officers/shareholders, you can reduce their salaries in exchange for an increased distribution of profits. A distribution of profits is not subject to FICA taxes, unemployment taxes, workers' compensation taxes or other expenses associated with salary.
Complete a tax return. An S-corp must complete a tax return reporting all income, losses, deduction and other information. This will provide all data needed for the shareholders to complete their individual tax returns and determine their tax obligations.
Consider state taxes. S corporations might have specific filing requirements in the states in which they are registered, as well as in any states in which they conduct business. It is important to be sure that the appropriate tax forms are filed in each state as required.