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15 August 2017

Are Corporation Profits Double (or Even Triple) Taxed?

Are Corporation Profits Double (or Even Triple) Taxed?

All too often, the answer to the question, “Are corporation profits double taxed?” is a resounding YES. But double taxation doesn’t need to be a fact of life for corporate business owners if they know how to navigate around it within the boundaries of the IRS.

Double taxation is a unique situation for C Corporation business owners because the structure of a C-Corp can lead to business profits being taxed at both corporate and personal levels. When C-Corps earn a profit, they pay an income tax. Then, when profits are distributed to shareholders through dividends, that money is taxed again as individual income tax. It’s even possible for some business owners to be triple taxed, if the business takes dividends from a subsidiary and is poorly structured.

There are several ways for corporations to avoid double (and even triple) taxation. They include:

  1. Treating all shareholders as employees of the company, paying them only REASONABLE wages and fringe benefits (only the amount deemed reasonable), which can be deducted by the corporation).
  2. Considering non-active shareholders who aren’t considered employees as consultants (which are tax-deductible business expenses ONLY if these expenses are “ordinary and necessary”) or paid as members of the board of directors.
  3. Changing to an S-Corp status, which can then "pass through" earnings (and taxes) to shareholders without the intermediate step of paying dividends. However, the corporation may be subject to possible future “built-in gains” taxation.
  4. If your business is connected to a subsidiary (either foreign or domestic), playing close attention to how the business pays out dividends to avoid a possible triple-tax scenario. 

If you are a stakeholder in a C-Corp, contact us to find out more about your risk of being double taxed. Making a few changes in how you’re paid or in how the business is structured could save you thousands of dollars in unnecessary taxes.

Image Copyright: ahirao / 123RF Stock Photo


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