The Complete Guide to Subchapter S-Corporations

When I was in college, I worked for a Certified Public Accountant. I would go into his office a few days a week, and I did data entry. The bookkeeper would give me checks that were coded, and journal entries to make and I would enter these transactions into accounting software. When the transactions were entered, I would run reports and give them to the CPA. The CPA’s office intimidated me. It was full of no less than 100 clocks that would tick…tick…tick. The clocks were set for different times. I never knew the significance of the differences in time. My best guess was that he set them for different times so they wouldn’t all chime at once.
One day a client called the office, and asked to speak to the CPA. I placed the caller on hold and went to the CPA’s office. The CPA’s back was turned to me, and he was working on his computer. He could barely see and I think might have been legally blind, so he was sitting scrunched up to the computer screen. As I made my way to his desk the tick…tick…ticking of the clocks was ominous…as if announcing my arrival a few of the clocks began to make a dinging noise. The loud clamber of bells startled me and caused me to stutter. “Mr. Moore you have a telephone call.” Mr. Moore sat there with his back turned to me. He asked me who was on the phone and I told him. Without turning around he said: “I need to know if he is an S-Corporation or a C-Corporation.” That was my first exposure to Subchapter S-Corporations.
S-Corporations are kind of a neat trick in the Tax Code. IRC §1361 defines an S-Corporation as:…the term “S corporation” means with respect to any taxable year a small business corporation for which an election under section 1362(a) is in effect for such a year. In layman’s terms an S-Corporation is what is known as a “flow-thru” entity. The corporation itself does not pay income tax. The profits (or losses) flow-thru to be claimed on the shareholders personal income tax return for the year.
Most small businesses, at least in their initial years, elect to be taxed as an S-Corporation. This book is designed to give you a clear understanding of how an S-Corporation functions. We will discuss the following topics:
•S-Corporation Election and Structure
•Reasonable Compensation and Distributions
•Common Issues of an S-Corporation
Before we get started I want to point something out. S-Corporations are very complicated. In this short book, I will give you the law, and try to simplify the Code for you.