S Is For Savings?

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Although Brian Murphy's article on S corporations was well done, the initial comparison of the tax results between operating as a regular corporation and as an S corporation was oversimplified to the point of being misleading. That is, it was assumed that the full $500,000 of earnings would be first taxed at the regular corporate level ($209,750 tax) and the aftertax amount ($290,250) then distributed to the owner and taxed ($145,125) again. In reality, the overwhelming likelihood is that only some of the earnings would be taxed at the corporate level, and some taken out and taxed at the owner's level; if so, the tax results could be better than with Subchapter S.

Many other considerations, such as reasonableness of compensation and getting the corporate profits out later in a taxable or nontaxable manner, enter into the choice of corporate form. Generally, a regular corporation favors those businesses that are reinvesting earnings in the business, and an S corporation favors those with losses (business losses to offset against other income, or the reverse).