A Corporation's "S Election "for Tax Purposes

A corporation can make a special federal and state tax election to change its tax status. This converts a regular corporation ("C" corporation) into an "S" corporation. For income tax purposes, the "S" corporation is treated as a sole proprietorship or partnership. The "S" corporation does not pay income tax. Instead, the income and expenses are passed through to the individual shareholders and are taxed at the individual rate.

An "S" corporation is particularly advantageous for new businesses that generate operating losses. The losses are passed through to the shareholders who can deduct them against other income. The shareholder must personally be involved in the corporations business activity on a regular basis to take advantage of this deduction and; cannot deduct losses exceeding her actual investment.