How to Keep the S-Corp Filing Status

By now you’ve hopefully learned all about S-Corps in What is an S-Corporation? and more importantly about the major tax saving possibilities by making the S-Corp election. You may have already taken our Quiz to decide if the S-Corp election is right for your business and even assured your small business’s eligibility by reading Who Can Make the S-Corp Election? That’s great news! You’re well on your way to saving money on your small business taxes. Or maybe you worked with our CPA Firm and accounting services for small business to recently make the S-Corp election. Congrats!

Now you’re wondering “What comes next? Am I done?” Well, not exactly. Those small business tax savings are pretty amazing, which is why you are definitely not going to want to lose them! Keeping S-Corp status for your small business does come with some upkeep- eligibility requirements to uphold, bookkeeping protocols, and S-Corp specific small business tax filing. Riveting stuff, right? Give us a call and our bookkeepers and accounting services for small businesses can make sure you keep S-Corp status without the headache. Ready to learn more about upkeep requirements and maintaining S-Corp status? Let’s get into it.

Maintain S-Corp Eligibility

We talked in depth about who can make the S-Corp election and the specifics of eligibility criteria in Who Can Make the S-Corp Election?, but it’s important to know that those requirements still apply after a small business has made the S-Corp election. If a small business becomes S-Corp ineligible at any time, the IRS can revoke S-Corp status or the S-Corp may be automatically terminated, and all those savings on your small business taxes go out the window.

The criteria to uphold, outlined by the IRS:

Must be a domestic corporation
Must issue only one class of stock
Limited to 100 Shareholders
- Families may count as one shareholder
Must have only allowable shareholders
- Individual U.S. citizens or permanent residents
- Certain trusts or estates
- Certain exempt organizations
- Qualifying single member LLCs

What happens if you inadvertently make a mistake? The IRS are still humans; at least we think… They may grant relief if a small business’s S-Corp status is involuntarily terminated due to an inadvertent mistake, but that comes with a lot more hoops to jump through, and it isn’t guaranteed. If you’ve found your small business’s S-Corp status in jeopardy, it’s probably best to consult a professional like our S-Corp accounting CPA Firm to figure out the next steps for your small business.

Hold Regular Meetings

S-Corps are required by law to hold annual shareholders’ meetings and periodic directors’ meetings. These meetings are held in order to discuss and review the business’s activities. Small businesses are required to record ‘minutes’ to have documentation of what was discussed and any decisions that were made.

Shareholders’ Meeting

Required annually. Shareholders in the company discuss the business and have the rights to:

Elect or remove directors
Amend the articles of incorporation and bylaws
Approve the sale of assets and mergers
Dissolve the corporation

Directors’ Meeting

Required “periodically”- there’s that vague IRS terminology again. The IRS doesn’t define exactly what periodically means, but holding a director’s meeting for your S-Corp at least annually is probably a good idea. During the meeting, directors discuss business and have the authority to:

Issue stock
Elect officers- the people responsible for day-to-day management and operations
Set the salary amounts of employees and officers
Make real estate decisions
Approve loans

Although the small business is not required to file meeting reports or ‘minutes’ to the state, you will need these records in case of an audit, revocation etc. It’s also a good habit for your small business to ensure you always have documentation of important decisions.

Use the S-Corp’s Business Name

Making the distinction between yourself and the business is a good idea for a variety of reasons, but it’s also legally necessary. Incorporating your small business and running an S-Corp has limited liability protection, but in order to keep that protection, documentation and transactions need to be in the name of the business rather than individuals. Here’s a list of some common areas you should use the company name for to ensure liability protection:

Legal documents
Banking activities- checking accounts, loans, etc.
Advertising material
Website
Business Cards

This is not an exhaustive list, but it should get you started in making a habit of using the company name instead of individuals. In case of a lawsuit, you’ll need to be able to show a clear legal distinction between any individual and the small business as a whole.

Keep Detailed Financial Records

Payroll

Personal payroll is a BIG one for S-Corps. As we talked about in What is an S-Corporation?, determining a salary for reasonable compensation is the crux of the small business tax savings that the S-Corp election provides. Check out How Much Should My S-Corp Pay Me? or give our CPA Firm a call to learn about the subject and how to determine salary for your S-Corp.

Once your ‘reasonable compensation’ is determined, it’s very important to set up your personal payroll procedure properly. S-Corps are required to submit quarterly payroll reports as well as make deposits based on the specific payroll amount. Like we said above, establishing and maintaining payroll correctly is huge for S-Corps and it requires strategy to maximize savings on your small business taxes while still adhering to the IRS requirements. Mistakes with personal payroll in an S-Corp is one of the most common things to cause a small business to lose its S-Corp status. We’re here to help navigate this tricky subject while ensuring that you’re saving the most on your small business taxes. Give us a call.

Bookkeeping

S-Corps are required to keep financial records for their corporate tax return at a minimum. Either of the accrual or cash methods of accounting are accepted for tax purposes, but your bank or investors may want to see US GAAP (Generally Accepted Accounting Principles) or IFRS (International Financial Reporting Standards). Regardless of which method is right for you and everyone you report to, you need bookkeeping of some kind no matter what. Luckily our bookkeeping service includes both accrual and cash basis accounting for one low monthly fee, so you can reap the benefits of cash basis for tax purposes while getting all the insights offered by accrual accounting to ensure you’re making all the right business decisions.

Detailed bookkeeping records ensure there will be no hiccups during tax season, protect your small business in case of an audit, and most importantly allow you to maximize savings on your small business taxes. We get it though, you’ve got a business to run, and detailed bookkeeping likely falls low on the to-do list, which is why our CPA Firm’s accounting service for small businesses is here to take one thing off your plate. Give us a ring, and let a professional bookkeeper handle the grunt work for you while making tax season a breeze.

File S-Corp Tax Returns

As you already know, a small business that has made the S-Corp election is a ‘registered corporation’. An S-Corp uses a pass-through structure, but it is still a corporate entity separate from any individuals, which means it requires a specific corporate tax return. Not totally clear on business structures? Check out What is the Best Entity Type for an S-Corp? for more about that topic.

Even in the case of a single owner S-Corp, a separate tax return is still required, which is different from a single member LLC that can put income on a schedule C. Additionally, if your small business has more than one owner or is an S-Corp, forget April tax season and drill MARCH 15TH into your memory! March 15th is the filing deadline for your S-Corp tax return, and K-1s must be distributed to each of the partners/shareholders. Missing that March 15th deadline or failing to distribute K-1s is a very common mistake for new businesses that have more than one owner or have elected S-Corp status. Don’t worry though, we take care of distributing K-1s for free with our tax subscription, and we won’t let you miss the deadline! Give us a call and chat with a real person about your S-Corp needs.

S-Corps are notorious for being well protected from audits. In fact, estimates show that S-Corps are audited up to fifteen times less frequently than sole-proprietorships. But, not filing your S-Corps tax return on time exponentially increases the chances of an audit. Additionally, it’s essential to file everything correctly to guarantee your small business’s S-Corp status is valid, at no risk of termination, and being used strategically for the most money savings on your small business taxes. Making sure your tax professional specializes in accounting for small business and S-Corp accounting, like our CPA Firm does, is the key to a smooth tax season and maintaining S-Corp status.

Takeaways

Remain S-Corp Eligible
- Be a domestic corporation
- Only issue one class of stock
- Only have 100 shareholders or less
- Only have allowable shareholders
Hold Shareholders’ and Directors’ Meetings
Differentiate the Business from Individuals, Legally and Otherwise
Document and Follow Required S-Corp Payroll Procedure
Detail and Follow Required Bookkeeping Practices
File S-Corp Tax Return Correctly and Timely
Deliver K-1s to shareholders by March 15th (assuming calendar year)

As you can see, there is certainly some upkeep that goes along with S-Corp status, but the tax advantages are well worth it in most scenarios. And after all, you can call us to handle all that mundane stuff while you reap those sweet sweet S-Corp tax rewards.