What is an S Corporation and what are its tax advantages?
An S Corporation, or an S-Corp, is a type of business entity found in the State of California under business transaction law. An S-Corp is similar to a “regular” corporation, or C-Corp, but it offers unique advantages when it comes to taxation. With an S-Corp, business income and losses are passed through to the shareholders of the corporation and taxed on their personal income tax returns. This differs from a C-Corp, in which the corporation itself is taxed on earnings and losses separately from the shareholders. The major tax advantage of an S-Corp is that it avoids double taxation because S-Corp earnings are taxed only once on the individual shareholder level. Also, an S-Corp may be exempt from certain federal and state taxes, such as the personal property tax. Additionally, since the S-Corp earnings are taxed on the shareholder level, owners of an S-Corp may be able to reduce their overall taxes through deductions for items such as office expenses, health insurance premiums, and allowable business expenses. Finally, S-Corp shareholders can pay themselves salaries and wages, which are subject to normal wage taxes and employment taxes and also receive dividends, which are taxed at a lower rate than wage or salary income. In summary, an S-Corp is a type of business entity under California business transaction law. It offers owners several tax advantages, including the avoidance of double taxation, exemption from certain taxes, deductions for business expenses and different tax rates for salaries and dividends.
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