Tax preparation for S Corporation shareholders is quite complicated. While there are substantial advantages for many owners or shareholders of an S Corporation there are also substantial risks which can lead to an IRS audit. Corporations which elect subchapter S tax status allow income to pass through to the shareholders to be taxed at an individual level. The IRS Form 1120S provides the IRS with information regarding the S Corporation’s income, losses, credits and deductions.
The S Corporation must prepare a K-1 for it’s shareholders which reports the shareholder’s income, deductions and credits. These forms are due on March 15 for those corporations who operate on the calendar year. For those corporations who work on a fiscal year, the forms are due on the 15th of the third month following the end of their fiscal year.
Tax preparation for S Corporation shareholders is crucial to avoid a California or IRS audit. Each shareholder in the S Corporation is responsible for reporting their proportionate share of the corporations income on their own personal tax return. Losses may be deductible, however you might not be able to claim the full amount of the losses as their are limitations for the deduction of losses based upon passive activity, at-risk amounts and the calculation of basis.
A high percentage of S Corporation shareholders do not properly or accurately calculate or report shareholder basis which represents a substantial IRS audit risk. In addition, the IRS and California’s tax agencies are closely scrutinizing the methodology for establishing “salary” or compensation. Typically a compensation methodology should include documentation based upon qualifications of the shareholder, the nature of the work provided to the S Corporation and a comparison of similar positions and their pay ranges in similar companies.
The tax attorneys and accounting professionals at Allen Barron prepare and file your tax return to ensure it fully complies with IRS and California tax codes while working to minimize the impact of taxation and reduce audit risk. Allen Barron provides a free consultation to S Corporation shareholders with income above $150,000 at 866-631-3470 or we invite you to contact us to learn more.