What is the tax treatment of an S-Corporation?

An S-Corporation is classified as a pass-through entity for tax purposes, which means it generally does not pay federal income taxes at the corporate level. Instead, the income, deductions, and credits of the S-Corporation are passed through to its shareholders, who report these on their individual tax returns. This aligns with how partnerships are taxed, where the entities themselves do not pay income tax but instead pass their income onto the partners who then report it on their personal tax returns.

This treatment allows S-Corporations to avoid the double taxation typically associated with C-Corporations, where profits are taxed at the corporate level and again at the individual level when distributed as dividends. By being taxed like a partnership, S-Corporations provide a favorable tax structure for shareholders, making option B the correct choice.