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One of the many aspects of starting a business is choosing the proper designation. Along with partnerships, C corporations, and limited liability companies, S corporations are another possible designation that offers many benefits. Below is more information about accounting and tax preparation if you own an S corporation. 

What Is an S Corporation?

S corporations have 100 shareholders or fewer, and they pass on profits and losses to these shareholders who face taxes on an individual level. To qualify for this designation, you must base the business in the U.S., not have shareholders that are partnerships or other corporations, and offer only one class of stock. Additionally, certain companies cannot become S corporations. This includes banks and insurance companies. 

How Is Accounting Handled for an S Corporation?

There are a few different accounting options if you run an S corporation. The accrual method entails recording profits as you earn them, not when a client pays them. For example, using the accrual method means you will register a profit in your financial ledgers after completing a project, not when a client pays for it.

tax preparationThere is also the cash basis accounting method, which only makes a financial entry after you receive payment. You can treat expenses the same way by their respective practices. This means that companies using the accrual method record an expense after sending a bill out, while those using the cash method wait until they pay the fee. 

What Should You Know About Tax Preparation?

S corporations are similar to regular C corporations when paying taxes. You must file a corporate tax return using Form 1120-S, while shareholders report their earnings and losses from a Schedule K-1. The IRS will tax owners for their share of the business on their personal returns. S corporations are also free of self-employment tax.

 

No matter what type of business you run, a reliable accounting partner is a must. PMC Tax Services LLC, supports small business owners throughout Lincoln, NE, by providing skilled accounting service. They can help with bookkeeping, tax preparation, and financial planning by creating comparison documents for your review. Call (402) 467-5529 to schedule an appointment. Visit them online for the full listing of services available to you. 

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