S corporations have been growing rapidly as a legal form of business organization over the past several decades.
In fact, according to data published in 2021 by the U.S. Bureau of Economic Analysis, the number of S corporation returns grew from approximately 57% of total corporations in 2000 to more than 73% in 2015.
During that same period, S corporations’ share of total corporate business receipts also increased (albeit at a slower rate), jumping from 20.5% in 2000 to 27.3% in 2015, as did S corporations’ share of total corporate profits.
In the experience of Jeff Levine, Kitces.com’s lead financial planning nerd and Buckingham Wealth Partners’ chief planning officer, S corporations have continued to grow in popularity since 2015, and the approach to running a small business is therefore critical for today’s financial advisors to study and understand.
During a recent webinar, Levine took a deep dive into the inner workings of S corporations, with the goal of helping advisors deliver key insights to their small-business owner clients.
As defined by the Internal Revenue Service, S corporations are corporations that elect to pass corporate income, losses, deductions and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the pass‐through of income and losses on their individual tax returns, and taxes are assessed at their individual income tax rates.
This allows S corporations to avoid double taxation on the corporate income in contrast to C corporations, Levine explains, which are taxed at the corporate level and again at the individual level from the profits distributed to corporation owners.
This difference not only affects decisions on how to incorporate a business but also when evaluating implicit corporate tax rates, Levine says. Ultimately, S corporations are responsible for taxes on certain built‐in gains and passive income at the entity level, but the structure can still deliver powerful tax savings to owners.
See the slideshow for a rundown of Levine’s top S corporation insights. From estate planning considerations to quirks in the annual tax filing process, there’s a lot for advisors and their clients to consider.