S corporations: Tax benefits for small business

In light of the recently passed Small Business and Infrastructure Jobs Tax Act – which offers new tax credits to small businesses with the hopes of promoting job generation – entrepreneurs may consider business incorporation to maximize their tax savings. Perhaps an S corporation would be the best choice for this.

S corporations are “pass-through” entities. This means that profits and losses are filed only on shareholders’ returns and no “double taxation” occurs.

The Wall Street Journal advises entrepreneurs to make the most out of this tax benefit by paying themselves a fair salary that is subject to payroll taxes. In doing this, the dividend the owner takes isn’t subject to a corporate tax rate or employment taxes.

The only major difference in filing an S corporation as opposed to other business types is that business owners must select S status on a special IRS form. There are some restrictions to S corporations – such as limit of no more than 100 shareholders – but many startup businesses will likely not be impacted by these regulations.

According to the Christian Post, forming an S corporation may be one of the best ways to maximize tax savings in 2010. The source even encourages existing entities to consider switching to an S corporation this year.