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An S Corporation is a type of business entity that elects to pass corporate income, losses, deductions and credits through their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates.

We recommend this election to many of our clients due to the various tax advantages of doing so. By electing to be an S corporation, each shareholder can avoid double taxation on their corporate income, and have the opportunity to lower their corporate income, by paying a “Pass-through Entity Tax” or PTE.

Pass-through entity tax allows a shareholder to pay a 5% tax on their business income, and then receive a PTE credit, which is 90% of the PTE tax paid.

We recently saved one of our veterinary client’s big tax savings by having them elect to be an S Corporation. Our client was losing deductions from the state and local tax deduction cap of $10,000 that was put in place in 2017. By doing this we were able to lower our client’s taxable income by $12,500 and receive a credit for $11,250. This in turn lowered our client’s tax liability, and allowed them to pay a large deduction on their personal return.