Contents
- Filing calendar: deadlines and extensions
- K and K-1 mechanics: allocations and separately stated items
- K-2/K-3 and modern reporting complexity
- Mandatory e-filing: the 10-return aggregation trap
- Reasonable compensation: methodologies and controls
- 2% shareholder health insurance: W-2 workflow
- Shareholder basis: ordering rules + debt basis risks + Form 7203
- Entity-level exception taxes: ENPI, BIG, LIFO recapture
- Corporate formalities: minutes, stock ledger, one-class-of-stock risk
- Washington case study: B&O, annual report, economic nexus
- Penalty regimes + mitigation (FTA, reasonable cause)
- 2025 operational checklist
1) Filing calendar: deadlines and extensions
For calendar-year S corps filing the 2024 return in 2025, the standard March 15 deadline lands on a Saturday—so the due date shifts to March 17, 2025. If you need more time, file Form 7004 for an automatic six-month extension to September 15, 2025; note this extends filing time, not payment time for any entity-level taxes (e.g., BIG tax). :contentReference[oaicite:2]{index=2}
2) Schedule K and K-1 mechanics: pro-rata is non-negotiable
S corps must allocate every item per share, per day based strictly on ownership—no partnership-style special allocations. A common failure point is misclassifying items that must be separately stated (e.g., charitable contributions, investment interest), which can distort shareholder-level outcomes like the Section 199A QBI deduction. :contentReference[oaicite:3]{index=3}
3) K-2/K-3: the “domestic exception” is narrower than it looks
Schedules K-2 and K-3 are required to standardize foreign tax credit and international information that used to live in “white paper” attachments. Even for mostly domestic S corps, the domestic filing exception is narrow and includes a “shareholder need” component—meaning you must affirmatively determine whether shareholders require the info for their personal returns. Failure to file when required can trigger penalties for incomplete returns. :contentReference[oaicite:4]{index=4}
4) Mandatory e-filing: the 10-return aggregation rule
For returns required to be filed on or after January 1, 2024, the IRS reduced the e-file threshold to 10 returns, using an aggregation rule. The count can include the 1120-S plus W-2s, 1099s, and payroll filings—so “small” companies can accidentally fall into mandatory e-file status. Ensure your process includes Form 8879-S and e-file-ready tooling. :contentReference[oaicite:5]{index=5}
5) Reasonable compensation: methodologies and controls
“Reasonable compensation” is a facts-and-circumstances standard (Section 162) and the most litigated S corp issue. Zero-salary positions for active owners are indefensible. The report recommends documented methodologies: (1) cost approach (“many hats”), (2) market benchmarking, and (3) independent investor test—then memorializing the decision in board minutes and paying wages on a regular cadence (not just year-end true-ups). :contentReference[oaicite:6]{index=6}
6) 2% shareholder health insurance: W-2 workflow matters
For shareholders owning >2%, premiums paid by the corporation must be included in W-2 Box 1 (and often shown in Box 14 for info), but excluded from Boxes 3 and 5 if properly structured. If you omit the Box 1 inclusion, the shareholder can lose the self-employed health insurance deduction. :contentReference[oaicite:7]{index=7}
7) Shareholder basis: the operational “third rail” (Form 7203)
Basis governs (1) distribution taxability, (2) loss deductibility, and (3) gain/loss on sale. The report emphasizes dual “buckets” (stock basis and debt basis), the economic outlay doctrine (guarantees don’t create basis), and the strict ordering rules: income increases basis, then distributions reduce it, then nondeductibles, then losses/deductions. Since Form 7203 is required in common situations (distributions, dispositions, loss claims), basis must be treated as a real-time ledger, not an audit reconstruction. :contentReference[oaicite:8]{index=8}
Debt basis repayment trap
If losses reduce debt basis and the corporation repays the loan before debt basis is restored by future income, the repayment can trigger taxable income— with character potentially impacted by whether the loan is documented as a formal promissory note. :contentReference[oaicite:9]{index=9}
8) Entity-level exception taxes: the pass-through “exceptions to the rule”
S corps can still face corporate-level taxes in specific scenarios: excess net passive income tax (when AE&P exists and passive income exceeds 25% of receipts), built-in gains (BIG) tax after C-to-S conversions during the recognition period (including the cash-basis A/R trap), and LIFO recapture payable over installments. Some of these rules also create status termination risk, not just extra tax. :contentReference[oaicite:10]{index=10}
9) Corporate formalities: compliance and liability protection share the same roots
The report stresses annual meetings/minutes, a current stock ledger, and strict one-class-of-stock discipline (identical distribution/liquidation rights). A frequent termination scenario is disproportionate distributions (timing or amounts that create preferential economics). Operationally: declare distributions by board action and pay them pro rata, simultaneously. :contentReference[oaicite:11]{index=11}
10) Washington case study: B&O is a different tax universe
Washington has no corporate income tax, but it imposes B&O tax on gross receipts with limited deductions—meaning officer compensation doesn’t reduce the base. The report also flags Washington operational filings (SOS annual report, business license renewal) and economic nexus thresholds (e.g., $100,000 WA-sourced receipts) that can pull out-of-state S corps into registration and reporting. :contentReference[oaicite:12]{index=12}
11) Penalties and mitigation: why “it’s informational” is not a defense
The 6699 late filing penalty is a shareholder-multiplier: for returns required to be filed in 2025, the report cites a base penalty of $245 per shareholder per month (up to 12 months). Separate penalties can apply for failure to furnish correct K-1s. Mitigation paths include “reasonable cause” and administrative First Time Abatement (FTA) for otherwise compliant entities; reliance on a tax professional alone is generally not sufficient (Boyle). :contentReference[oaicite:13]{index=13}
2025 operational checklist
- • Lock the filing calendar: Mar 17, 2025 due; Sep 15, 2025 extended; confirm any fiscal-year deadlines. :contentReference[oaicite:14]{index=14}
- • Validate K-1 separately stated items (protect 199A/QBI outcomes). :contentReference[oaicite:15]{index=15}
- • Determine e-file mandate under the 10-return aggregation rule; execute 8879-S controls. :contentReference[oaicite:16]{index=16}
- • Run a K-2/K-3 “need inquiry” with shareholders; document the result. :contentReference[oaicite:17]{index=17}
- • Annual reasonable comp study + board minutes + regular payroll cadence. :contentReference[oaicite:18]{index=18}
- • Ensure >2% health premiums hit W-2 Box 1 (not 3/5). :contentReference[oaicite:19]{index=19}
- • Maintain shareholder basis worksheets and Form 7203-ready reporting; formalize shareholder loans with notes. :contentReference[oaicite:20]{index=20}
- • Track AE&P and passive income ratio; monitor BIG/LIFO exception taxes where relevant. :contentReference[oaicite:21]{index=21}
- • WA: separate federal vs B&O planning; confirm SOS annual report and DOR renewal processes. :contentReference[oaicite:22]{index=22}