What allows a corporation to pass income and losses to shareholders?

S-Corp status is a specific tax designation available to certain corporations that allows for pass-through taxation. This means that the income and losses of the corporation are not taxed at the corporate level. Instead, they are passed directly to the shareholders, who report this income or loss on their personal tax returns. This structure helps avoid the double taxation that typically occurs with C-Corporations, where the corporation pays taxes on its income and shareholders also pay taxes on dividends received.

S-Corps can only have a limited number of shareholders and must meet specific IRS requirements, but those that qualify benefit from the flexibility of pass-through taxation. This is a significant advantage for many small businesses, as it can lead to tax savings and simplified reporting.

Other types of entities, such as C-Corporations, are taxed separately from their owners, while partnerships provide similar pass-through treatment as S-Corps but are not considered corporations. Thus, the S-Corp designation uniquely enables this tax-saving mechanism for corporate structures.