Corporate Taxation
Corporations fall under Subchapter C (C Corporations) or Subchapter S (S Corporations) of the Internal Revenue Code.
S Corporations:
- Do not pay federal income tax.
- Net profit or loss flows through to shareholders’ tax returns.
- Specific income and expense items retain their character for shareholders.
C Corporations:
- Are taxpaying entities, resulting in double taxation.
- File Form 1120 to report income and expenses.
- Tax is computed on net income, and dividends are taxed again at the shareholder level.
Single Shareholder C Corporation:
- May benefit from organizing as a sole proprietorship if all dividends are distributed to the shareholder.
- Reasonable compensation is deductible, but excessive compensation is scrutinized by the IRS and may be treated as a constructive dividend.
JGTRRA Impact:
- The 2003 act reduced the top rate on dividend income to 15%, decreasing the double taxation burden.
- Motivates companies to pay dividends, balancing between compensation and dividends for tax benefits.
Choosing Business Structures:
- Consider tax and non-tax factors favoring corporations over proprietorships.
- Losses in C Corporations do not affect shareholders' income, unlike proprietorships, partnerships, or S Corporations where losses pass through to owners’ tax returns.
For compliance assistance, contact us at support@novataxation.com.