Basics and Benefits of C Corp Taxation

There is an irony to taxation when it comes to forming businesses. On the one hand, nobody wants to pay taxes, or certainly, they don’t want to pay more than they have to. On the other hand, when considering the pros and cons of starting a business many new business owners overlook the tax consequences of differing business entities.

C Corps Pay Their Own Taxes

The main thing to remember if you opt to form a C corporation is that unlike almost every other kind of business structure, a C Corp business pays its own taxes on its own profits—and also uses its own deductions.

Think of a corporation as its own “person” that gets tax breaks and benefits and pays taxes, just as you would as a person.

One benefit of this tax setup is that a corporation generally has a lot of expenses, many of which are deductible from the profits that the business makes. Whether purchasing inventory or equipment, making improvements, considering advertising costs, or paying into employee retirement—all are expenses that can, to some extent, be used to lower the company’s tax burdens.

Other business entities, like LLCs or partnerships, or even S Corporations, don’t work this way. They pass their profits through to the owners, and the owners pay taxes on the profits or money they realize as a consequence of being an owner of the business.

Taxes on Profits

For companies, they are taxed on profits, but it doesn’t matter what the profits are actually ultimately used for—if the profits are paid to shareholders, or if the profits are retained to make improvements, or to save for a rainy day, it doesn’t matter: profits are still profits that are taxable in the eyes of the IRS.

However, the IRS does allow a business to hold an amount of money, between $150,000 and $250,000, without facing tax penalties on that money.

Shareholder Dividends

Shareholder dividends can have tax consequences, because they can be taxed twice by the government.

The money made and ultimately paid to shareholders is taxable profit to the company. On the other end, dividends are income from the perspective of shareholders, and thus, those shareholders must pay income tax on money realized from dividends.

There are, however, scenarios where dividends can be paid as salaries as opposed to dividends, which may have tax benefits for both shareholder and company. This is available where shareholders may also work for the company or perform services for the company.

Lower Tax Rates

One benefit to C corporate taxation, is that as of now, corporations pay a flat tax rate of 21% on profits. However, an individual’s top tax rate can hit 37%, if the person earns enough money. So, in circumstances where a business owner may have personal wealth or income that hits the upper level tax brackets, forming a C corp, and having the company capped at 21%, may be advantageous.

Taxes matter – let us help you pick the right business entity for you. Call the West Palm Beach commercial litigation lawyers at Pike & Lustig today.

Source:

blockadvisors.com/resource-center/small-business-tax-prep/c-corp-tax-guide/#:~:text=C%20Corporations%20must%20pay%20federal,federal%20and%20state%20employment%20taxes.