Introduction to S Corporations
An S corporation allows income to pass directly to shareholders without paying federal corporate taxes. S corporations avoid double taxation on corporate income. To start an S corporation in Hawaii, form a limited liability company or corporation. Then apply to the IRS for S corporation status. One advantage of an S corporation is that it provides owners limited liability protection.
Shareholder Basis Calculation
When calculating shareholder basis, it measures how much a shareholder can receive from the S corporation without tracking gain or income. This happens at the end of the taxable year. Each shareholder’s basis represents their economic investment in the business.
Reporting and Tax Implications
- Use Form 1120-S to report S corporation income, gains, losses, and deductions.
- Income from an S corporation Schedule K-1 is not considered earned income. It is not subject to self-employment tax or FICA withholding.
- An S corporation can reduce taxes paid by business owners. However, if shareholders do not receive dividends, S corporation value could be less. Shareholders still pay taxes on S corporation income.