What is the tax treatment of income for an S Corporation?

In an S Corporation, the key feature is that it operates as a pass-through entity for tax purposes. This means that the income generated by the corporation is not taxed at the corporate level; instead, it is passed through to the individual shareholders. Each shareholder reports their share of the corporation's income on their personal tax returns, subject to their individual tax rates.

This structure avoids the double taxation typically associated with C Corporations, where income is taxed at both the corporate level and again at the individual level when dividends are distributed to shareholders. By allowing income to pass through to the shareholders, the S Corporation provides a significant tax advantage. Shareholders report their pro-rata share of the S Corporation’s income, losses, deductions, and credits, enabling them to possibly benefit from tax attributes that may offset other income.

While it is true that S Corporations may still have to pay certain taxes, such as state-level taxes or specific built-in gains taxes under certain conditions, the essential characteristic of being a pass-through entity is what fundamentally defines the tax treatment of income for an S Corporation.