Posted by Fletcher Accounting and Tax Service Inc.

Tax Considerations for C Corporations

Tax Considerations for C Corporations

When a business is first organized, the structure of the company determines how earnings are taxed. There are various types of business entities, including a sole proprietorship, partnership, C corporation, and an S corporation. Let's look at the specific tax situations pertaining to a C corporation.

C Corporation Structure

C corporations and S corporations have some similarities, such as a board of directors, shareholders, and articles of incorporation, but they are taxed differently. An S corporation is what we call a flow-through entity, that is, the profits flow through the company and are taxed on the tax returns of the shareholders. S corporations are taxed similarly to sole proprietorships and partnerships. A C corporation, however, is considered their own taxpayer, once removed from their owners.

Double Taxation

The profits of a C corporation are essentially taxed twice. First, the company's profits are taxed at the corporate level before they are distributed to shareholders. Once taxed, funds are then divided among the shareholders and taxed on the shareholders' personal tax returns. While this may seem like a hindrance, the benefits of organizing a company as a C corporation can outweigh this double taxation.

Salaries Can Offset Income

Salaries drawn by the operators of a C corporation can be deducted from profits. These salaries are therefore not taxable at the corporate level. In some cases, salaries may offset all profits, eliminating the need for the corporation to pay income tax. However, if a corporation has not paid out income tax for several years it may draw the attention of the IRS. It is wise to make sure that salaries paid to operators conform to industry standards. If the IRS decides to disallow some of the salaries, this could result in a tax bill including penalties and interest. Those choosing to form a C corporation should seriously consider retaining a tax specialist for these types of issues.

C Corporations Can Also Accumulate Earnings

All earnings do not have to be paid out as dividends to shareholders. Usually, a corporation can retain up to $250,000 in earnings without making a distribution. However, the retention of earnings must relate to a particular business need. A company who is planning a considerable property purchase could accumulate earnings without raising any red flags. Planning these acquisitions can save the corporation income tax expense.

Questionable Corporate Interaction

Some interactions between shareholders and stockholders and the corporation may be looked at closely. The corporation should ensure that those who have an interest in the company are not receiving preferential treatment. For example, if a corporation sells a piece of property to one of its stockholders at less than fair market value, this could be considered what is known as a constructive dividend. Other constructive dividends include the payment of a stockholder's personal expenses by the corporation or paying an employee who owns stock an exorbitant salary.

Tax Advice

For those planning to start a corporation or those who already own one, tax advice is invaluable. Beyond simply preparing tax returns, tax planning is also needed. Fletcher Accounting and Tax Services is uniquely prepared to serve the tax needs of corporations. Contact them today to see what they can offer your company.

Fletcher Accounting and Tax Service Inc.
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