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OK online Form Steps to Complete 2553 IRS: What You Should Know
If you've already decided on an S corporation, then skip this article and go to our complete guide. If not, read on for your tax filing requirements, starting a small business, and getting a business license. Taxation for S-Corporations 2024 — IRS In 2017, S corporations are taxed at a higher rate than C corporations. The highest tax rate is 55% for the largest S corporations (those with 10 million or more in assets). The rate decreases for smaller S corporations (with 1 million in assets or less), and then declines to 35%, 30%, 25%, and finally 10% for the next 10% of S corporations with assets in excess of the first 10%. Tax on Investment Income S Corp shareholders are required to pay tax on their investment income. This is called the ordinary tax or the ordinary share and also called the long taxable income rate. Why S Corporation Shareholders Must Pay Tax on Investment Income As we discussed in the pre-election article, when a corporation receives a specified amount of investment income from a partner, the share of investment income that is taxed as ordinary income is reduced. For example, if a partnership owns a 1 million interest in an S corporation, 50% (1 million / 1 million) or 100,00 of the 1 million is taxed as ordinary income, while the other 50% (500,000 / 1 million) is taxed as capital gain. The 50% reduced amount is then taxed as either capital gain or as ordinary income. The reason that S corporation shareholders must pay tax on investment income is because the rules of the federal income tax law protect the value of your shares if your share of investment income is lower or is not taxed at all. The only income that cannot be taxed as ordinary income is salary, interest, dividends, or royalty income. The Internal Revenue Code contains a special rule for this reason, called the 10% rule. The 10% rule says that if you receive 10% (or less) of a specified amount of income from a partner, then not all of that income (or any part of it) must be taxed as ordinary income. The amount that doesn't have to be taxed as ordinary income is equal to the lowest of the amount of tax that has already been paid or the amount of ordinary income that has not already been taxed as ordinary income.
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