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The different types of S corporation taxes vary based upon jurisdiction. S corporation elections occur at a federal tax level in the United States. Some states within the US also require the corporation to make an election at a state level at the same time as the corporation makes its federal election under Subchapter S of Chapter 1 of the Internal Revenue Code. This election allows a corporation to pass its gains and losses to its shareholders, who are required to pay tax on their allocated share of the corporation's income.
Once a corporation makes a federal election for Subchapter S status, the corporation is no longer taxed on corporate gains or losses. The shareholders of the corporation pay all federal S corporation taxes. The corporation is responsible for all taxes associated with its employees and any required state taxes. The shareholders pay individual income taxes on their allocated portion of the corporation’s income or loss.
The corporation and the individual shareholders benefit when the corporation makes an election to become an S corporation. The S corporation taxes allow the income made by the corporation to be taxed at one level only. Under normal circumstances, a corporation’s income is taxed at a corporate level, and any dividends paid to the shareholders are taxed again at an individual level. Under the S corporation election, the shareholders pay the income tax, effectively avoiding double taxation.
Specific requirements must be met by a corporation in order for it to make an S corporation election and receive the benefit of S corporation taxes. As long as these requirements are met, the corporation may remain an S corporation. When any of the requirements are no longer met, the corporation immediately returns to the regular taxation scheme.
A corporation that has elected S status under the S corporation tax provision receives preferred tax status; however, there is no change to its regular corporate status. The shareholders of the corporation retain the limited liability for any action taken by the corporation itself, unlike a partnership or sole proprietorship. These special tax regulations allow the shareholders to benefit by forming a corporation for liability purposes and to pay taxes at an individual level on the income gained by the corporation.
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