On their individual tax returns, shareholders of S corporations must account for what?

Shareholders of S corporations must report shares of profits or losses on their individual tax returns because S corporations are pass-through entities. This means that the income, deductions, and credits of the S corporation "pass through" to the shareholders, who then include this information on their personal tax returns. Each shareholder reports their allocated share of the corporation’s income or losses based on their ownership percentage, which is essential for accurately reflecting the financial results of the S corporation on their tax forms.

By doing this, shareholders are taxed on the income regardless of whether or not it is distributed as dividends. This tax structure avoids the double taxation that typically applies to C corporations, where income is taxed at both the corporate level and again at the shareholder level when distributed as dividends. As a result, understanding the pass-through nature of S corporations is crucial for shareholders regarding their tax responsibilities.