S Corporation vs C Corporation

Based on the provided context, an S corporation generally offers more tax advantages than a C corporation for most small businesses. Here are the key tax benefits:

1. Avoids Double Taxation [1]:

• S corporations pass income directly to shareholders, avoiding corporate-level tax
• C corporations face taxation at both corporate level (21%) and shareholder level when distributing dividends

2. Pass-through Benefits [2]:

• Business losses can pass through to shareholders
• No self-employment tax on S corporation income (beyond reasonable salary)
• Shareholders may qualify for the 20% qualified business income deduction

However, C corporations might be more beneficial in specific situations [1]:

• When retaining earnings for future business use
• For businesses offering extensive fringe benefits to owner-employees
• When the flat 21% corporate tax rate would be advantageous compared to individual tax rates

The choice between S and C corporation status should consider factors like business goals, distribution plans, and desired fringe benefits. S corporations generally provide better tax treatment for small businesses, but specific circumstances might favor C corporation status.

For S corporation owner-employees, fringe benefits are more limited compared to C corporations. Here are the key points:

Treatment of Fringe Benefits [1]:

• S corporations are treated as partnerships for fringe benefit purposes
• More than 2% shareholders are treated as partners
• Family members of 2%+ shareholders (spouse, children, grandchildren, parents) are also subject to these limitations

Available Benefits [2]:

• Some excludable fringe benefits are available
• Health insurance premiums (must be included in W-2 wages)
• Meals and lodging furnished for employer's convenience
• Group term life insurance up to $50,000

Health Insurance Special Rules [3]:

• More than 2% shareholders can take an above-the-line health insurance deduction
• Premiums must be paid or reimbursed by the S corporation
• Must be included in shareholder's W-2 wages
• Deduction limited to Medicare wages shown in Form W-2 box 5

De Minimis Benefits [1]:

• Minimal personal use of company assets may be excluded
• Must be offered as part of a company-wide policy