electing to be taxed as an S corporation files IRS Form 1120S, Income Tax Return for an S Corporation. Each owner shows their share of corporate income, credits, and deductions on Schedule K-1 (Form 1120S). A single member Limited Liability Company electing to be taxed as a disregarded entity does not file a return and its owner reports all income on Form 1040 and appropriate schedules. Tax Rates The rate of tax paid on income from the business activity depends on how the business is organized. Income from a sole proprietorship, S corporation, partnership, or Limited Liability Company is taxed to the owner at federal and state individual rates. A C corporation’s income is taxed to the corporation at the federal and state corporate rates. Federal Corporate Income Tax rates. Corporations, including qualified personal service corporations and members of a controlled group, are taxed at a flat rate of 21 percent of taxable income. The Inflation Reduction Act of 2022 imposed a minimum tax of 15 percent. Federal Individual Income Tax Rates. The federal individual tax rate applicable to pass through income for owners of sole proprietorships, S corporations, and Limited Liability Companies taxed as pass through entities depends on income. The tax rates for 2024 are: Tax Rate Individuals Married Filing Jointly 10% Up to $11,600 Up to $23,200 12% $11,600 to $47,150 $23,200 to $94,300 22% $47,150 to $100,525 $94,300 to $201,050 24% $100,525 to $191,950 $201,050 to $383,900 32% $191,950 to $243,725 $383,900 to $487,450 35% $243,725 to $609,350 $487,450 to $731,200 37% $609,350 or more $731,200 or more Net Investment Income Tax. A Net Investment Income Tax of 3.8 percent is imposed on unearned income of individuals whose adjusted gross income exceeds $200,000 ($250,000 for joint filers). For purposes of the tax unearned income includes interest, dividends, most capital gains, and income from passive business activities. Federal Deduction for Qualified Business Income of Individuals. The 2017 Tax Cuts and Jobs Act added a new section 199A to the Internal Revenue Code providing that non-corporate pass- through taxpayers. taxpayers may deduct up to 20 percent of qualified business income from gross income from a partnership, S corporation, or sole proprietorship or deduct up to 50 percent of the greater of W-2 wages paid by the qualified business or the sum of 25 percent of W-2 wages plus 2.5 percent of the basis of all qualified property. Qualified business income is defined as the net amount of income, gain, deductions, and loss. A qualified business is a trade or business (not being an employee) that is not a specified service business to include professional practices (e.g., doctors, dentists, accountants), consulting activities, athletes and athletic performances, brokers and financial services, investments and investment managers.
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