This is perhaps the benefit with the most appeal for business owners, as well as the most well-known feature. Electing S-corporation status when incorporating a business provides potential tax benefits in two ways. The first is pass-through taxation, and the second is the way shareholders’ income can be characterized on tax returns.
Pass-through taxation means that S-corps do not pay federal taxes. Instead, losses and income are reported on shareholders’ personal income tax returns. The topic of double taxation comes up here, as pass-through taxation allows corporations to avoid being taxed twice. S-Corp election also allows shareholders to use business losses to counteract or balance other reported income.
In addition to pass-through taxation, s-corps also offer their shareholders the ability to receive a salary and report income as employees while also collecting tax-free dividends and other distributions. This means that if you elect s-corporation status, you could lower your self-employment taxes and create deductions for your business.
It should be noted that some S-corporations in Florida may be required to pay a 5.5% corporate income tax on passive income earned after 2021.