S Corp Bookkeeping: Complete Guide

cafe owner, bookkeeping as an s corp owner

Declaring Your Business as an S-Corp

Choosing an S-Corporation (S-Corp) structure for a business offers several benefits, which is why it’s one of the most popular entities for small business owners. One of the biggest advantages of an S-Corp is pass-through taxation. This means that the profits and losses of the business are passed through—reported—on the individual’s tax return. Often, this results in a lower tax liability for the owner of the S-Corp.

Another major benefit is the protection of personal assets from business debts and legal claims against the business. Yet another reason to choose an S-Corp entity is the credibility that this entity structure lends to your business.

Still, the choice to declare your business as an S-Corp must be made with thoughtfulness and consideration for your unique business needs.

Is this the Right Entity For Your Business?

When deciding whether an S-Corp entity is right for your business, you should consider several factors. S-Corps are ideal for small businesses, but may not be right for larger ones. So if you are planning to expand your business in the future, and you want to avoid reorganizing your business structure, you may want to consider alternatives to an S-Corp.

You should also consider your personal need for liability protection. While an S-Corp does offer some protection, those with a great number of personal assets, such as a real estate or business portfolio, may want to choose an entity structure with even greater liability protection, such as an LLC. [1]

In summary, S-Corps are ideal for:

  • individuals seeking extra tax deductions
  • small business owners who want a simple tax structure

If you remain on the fence about whether to declare your business as an S-Corp, seek the advice of a reputable CPA.

What Tax Form Does an S-Corp Fill Out?

s corp owner filling out tax form 1120-S

Like other business entities, several different tax forms must be filled out for S-Corps. The main form is Form 1120-S, which is the income tax return specifically for S-Corps. This is the form where you or your CPA would report the business’s income, expenses and credits. At the end of the form, the calculations lead to the tax liability.

S-Corps must also complete Schedule K-1. This form would be issued to each shareholder, which outlines their shares of the business’s income, expenses, credits and other tax itemizations. Each shareholder is personally responsible for reporting their relevant part of the S-Corp’s income on their personal tax returns.

If the S-Corp has employees, it may need to file Form 941, which is the Employer’s Quarterly Federal Tax Return. This has to be filed each quarter, along with associated taxes due. Failure to do so may result in penalties, which include interest on unpaid taxes.

Because of the complex nature of S-Corp tax returns and quarterly requirements, most S-Corp business owners opt to let their bookkeeper or CPA handle the details. [2]

Accounting For an S-Corp

The accounting for an S-Corp is more complicated than personal accounting. It’s essential to stay on top of bookkeeping for an S-Corp in order to maintain a positive cashflow and to understand the financial position of the business at any given point.

Revenue

Revenue represents the income of the business. It can come from several different streams, or from one main source. Revenue is typically generated from the sale of goods or services, interest income, investment income, collection of fees, gains from sale of assets, and more. Ideally, revenue income is separated into categories for the purposes of analyzing needs and performance of the business.

Expenses

Expenses represent outgoing money from the business. This category of bookkeeping for an S-Corp may include bills, taxes, interest paid, fees and other costs, such as payroll. Expenses are listed on a business’s P&L (Profit and Loss statement). Like revenue, expenses should be broken down into their various categories. Doing so not only helps the owner and shareholders to get a financial snapshot of money being spent; it also helps at tax time, since some of the business expenses will be tax deductible, depending upon their nature.

Assets and Liabilities

Assets and liabilities should be tracked separately. Assets include property that the business owns, such as vehicles, software and office equipment. Liabilities include outstanding debts, such as business loans and taxes. Tracking the value of assets and liabilities is complicated. An asset’s value is usually calculated when it’s acquired, but another factor, called amortization, also comes into play. Amortization is a strategy used by tax professionals to spread out the value of a tax deductible asset over a period of time; typically several years. Assets are also subject to depreciation, where their value decreases over time. Similarly, liabilities are adjusted over time as payments are made on the debt.

Shareholder Basis

Shareholders of an S-Corp must track their basis—interest—in the business. Generally, a shareholder’s basis reflects the funds they invest or contribute to acquire their stake in the business. This basis is adjusted upwards when the S corporation generates profits and downwards in the event of losses. Annually, shareholders receive a K-1 statement from the S corporation, detailing various items impacting their basis. Although shareholders are primarily responsible for maintaining accurate basis records, the S corporation might find it beneficial to provide guidance on basis accounting to ensure compliance and understanding among shareholders.

Tools to Help Calculate Reasonable Compensation

S-Corps are subject to scrutiny from the IRS regarding compensation. This is to prevent owners from adjusting their compensation unreasonably in order to avoid paying higher taxes. When a business owner can prove that their compensation is within reasonable parameters, they are heavily protected from potential issues arising from IRS scrutiny.

cafe owner standing by the espresso machine smiling because he's gotten help understanding compensation from RCReports

One such tool to help calculate reasonable compensation for business owners, shareholders and employees is RC Reports. RC Reports is a compensation analysis solution that provides objective compensation reports and analysis for S-Corps and other kinds of business entities. The data and analysis offered by RC Reports stands up to IRS scrutiny and litigation. Learn more at RCReports.com.

Sources

1. Stripe. (2023, March 23). S corp vs LLC: How They’re Different and How to  Choose. https://stripe.com/resources/more/s-corp-vs-llc

 “Both LLCs and S corps offer limited liability protection for owners, but LLCs may provide more flexibility in terms of personal asset protection—especially if the business has multiple owners.”

2. Attorney, D. M. S. (2015, August 18). S Corporation Tax Filing RequirementsNolo. https://www.nolo.com/legal-encyclopedia/s-corporations-irs-tax-filing-requirements.html

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