le taking advantage of individual tax rates (in those instances where individual tax rates are lower than those for corporations).
The conceptual basis for the Subchapter S Corporation is the ability to avoid double taxation on corporate profits. Subchapter S corporations generally are not subject to tax at the corporate level. Rather, each shareholder reports her or his share of corporate income on her or his individual income tax return. The shareholders of the Subchapter S Corporation then are entitled to withdraw such income through a distribution from the corporation without additional federal income tax.
A basic feature of Subchapter S Corporation taxation is that shareholders are able to receive tax-free distributions to the extent of the corporate earnings they report on their personal income tax returns. Not all distributions are free of federal income tax liability. Subchapter S Corporations with no accumulated earnings and profits (AE&P) are permitted to make distributions that are free of federal income tax liability to the extent of a shareholder's adjusted basis in the stock of the corporation. Distributions in excess of the adjusted bases of all of the shareholder's shares of stock are treated as gain from the sale or exchange of property, and are taxable as a capital gain.
Subchapter S Corporations with AE&P are permitted to make distributions that are free of federal income tax liability to the extent that the appropriate accumulated adjustment account (AAA) of the corporation also is free of federal income tax liability to the extent of the recipient shareholder's stock basis. Distributions in excess of the corporation's AAA are treated as taxable dividends to the extent of the corporation's AE&P. Any remaining distributions are treated as are those made by a Subchapter S Corporation without AE&P.
The dollar limit on earned income and self-employment income subject to the Medicare hospital in...