IRS Changes S Corporation Shareholder K-1 Forms
Shareholders of S-corporation stock will notice a striking new look to their 2004 K-1 forms. The Federal IRS K-1 forms have been updated and given a more modern appearance.
The K-1 form is filed with the IRS and given to shareholders by the corporation so that shareholders can see their share of the company's income, deductions, and various pass-through tax credits.
S corporations file the IRS 1120S income tax return, though many S corporations don't pay any income tax directly.
The S corporation is a pass-through tax entity. This means an S-corporation's income passes through to its shareholders in proportion to their stock holdings. For example, if an S corporation earned $100,000 and had one shareholder, that shareholder would have an additional $100,000 in income added to her personal 1040 income tax return. If the corporation had two shareholders, one owning 25% of the shares throughout the year and the other owning 75% of the shares, one shareholder would report $25,000 in pass-through income, while the other shareholder would report $75,000 in pass-through income.
Just because taxable income is reported to a shareholder and listed as income on the shareholder's 1040 personal tax return, doesn't mean the shareholder actually receives any income. The corporation may have decided to retain its earnings. When you're taxed on income not received, it's called 'phantom income.'
In addition to business income, the new K-1 form reports pass-through capital gains, interest income, and Section 179 expense deduction.
Tax filing day is quickly approaching for most S-corporation owners. Most S corporations operate on a calendar year basis. This means their 1120S S-corporation tax return is due March 15, 2005. That date also marks the date by which most S corporations must provide shareholders with K-1 forms. Tax forms and instructions are available on IRS.gov.
Itís important for S corporations with multiple shareholders to get shareholder K-1 forms out early, because they're necessary for individual shareholders to do their 1040 income tax return.
Other tax changes for 2004 affect new S corporations. Business organizational costs and start-up costs can be capitalized or amortized, as was previously allowed under the tax law. Many small corporations would amortize business start-up costs over 60 months. But, beginning in October 23, 2004, companies with under $50,000 in start-up costs can elect to deduct up to $5,000 in business start-up costs the year the business begins operations.
S corporations are usually operated by a small number of business owners. For tax years beginning after 2004, the maximum number of shareholders an S corporation can have was increased from 75 to 100.
Most S corporations are very closely held. Many have only one shareholder who also serves as the only corporate officer and the only corporate director. Originally, the S corporation was designed to allow small business owners who operated as sole proprietors to gain the limited liability protection of corporate status with a pass-through tax device. Recently, the limited liability company (LLC) is also serving that role.
A summary of the tax changes affecting individuals and business owners is available in IRS Publication 553.
Peter Hupalo, author of
How to Start And Run Your Own Corporation: S-Corporations For Small Business Owners
Tax changes give S-corporation shareholders an updated K-1 form, increase the number of allowed S-corporation shareholders from 75 to 100, and allow the immediate deduction of some business start-up costs.