Qualification for S Corporation
S Corporation is a U.S corporation with no more than 100 shareholders. All shareholders are individual U.S citizens or resident aliens or other S corporations, or an electing small business trust. The corporation has only one class of stocks. There can't be any preferred classes of shares.
Tax Reporting
Although an S corporation business is not a tax paying entity it is most definitely a tax reporting entity. S corporations must file an annual corporation tax returns. California corporations need to file state tax returns as well and need to pay a minimum annual franchise tax of $800 even if the corporation loses money.
At Kyrish CPA, Sunita Jagasia is a Certified Public Accountant with many years of experience filing corporate taxes. Corporation taxes are tricky and should always be professionally prepared.
An S corporation reports to the IRS each stockholders proportionate share of its profit (or loss) on annual IRS schedule K-1 forms. In addition S corporation must file and pay employment taxes on its employees.
Material Participation
As an S corporation shareholders, must materially participate in the business to deduct losses against other income. Merely being an investor in an S corporation doesn't cut it. If challenged by the IRS at an audit you should be prepared to show proof of material participation.
IRS auditors may question low S corporation owner salaries. It hasn't escaped the notice of the IRS that S corporation owners minimize their self-employment taxes by taking dividends.