Final answer:
Shareholders of a closely held S Corporation are taxed on their share of the corporation's income. This is known as pass-through taxation, where the corporation's profits and losses flow through to the individual shareholders. The tax rates for S Corporation shareholders are the same as those for other individuals and not specifically lower.
Step-by-step explanation:
The tax treatment for shareholders of a closely held S Corporation is that they are taxed on their share of the corporation's income. This means that shareholders are required to report their portion of the corporation's income on their personal tax returns and pay taxes on it at their individual tax rates.
Unlike a C Corporation, which is subject to double taxation where the corporation is taxed on its profits and shareholders are taxed on their dividends, an S Corporation's income is only taxed at the shareholder level. This is known as pass-through taxation, where the corporation's profits and losses flow through to the individual shareholders. The shareholders then pay taxes on their share of the profits or can offset any losses against other income.
It's important to note that the tax rates for S Corporation shareholders are the same as those for other individuals and not specifically lower. The tax rate depends on the shareholder's total taxable income and the applicable tax brackets.