The average U. Carl Levin D-Mich. Tax Code Sept. Some big corporations pay little to nothing in taxes now. Lowering the corporate income tax rate is costly and unaffordable.
If a corporation distributes dividends to the owners, they must report and pay personal income tax on these amounts. And because dividends, unlike salaries and bonuses, are not tax-deductible, the corporation must also pay taxes on them. This means that dividends are taxed twice -- once to the corporation and again to the shareholders.
Smaller corporations rarely face this problem: Because their owners typically work for the corporation as employees, the corporation can pay them in the form of tax-deductible salaries and bonuses, rather than taxable dividends. The scheme of taxation described in this article applies only to regular corporations, called C corporations.
By contrast, a corporation that has elected S corporation status pays taxes like a partnership or limited liability company LLC : All corporate profits or losses "pass through" the business and are reported on the owners' personal income tax returns. To learn more about S corporations, see S Corporations. The Tax Cuts and Jobs Act established a new income tax deduction for pass-through entities.
Regular C corporations are not pass-through entities; thus, their shareholders do not qualify for this deduction. Although reporting and paying taxes on a separate corporate tax return can be time consuming, there are some benefits to having a separate level of taxation. Here we explain a few of them, but you should see a tax expert for a complete explanation of the pros and cons of corporate taxation as it applies to your situation.
This is a very complicated area, and for some companies -- especially those that may experience losses, are involved in investing, or may soon be sold -- corporate taxation can be a real disadvantage. The benefit of the lower rates is largely lost due to double taxation if corporate profits are distributed to the shareholders, who must pay individual income tax on such dividends.
However, many corporations want or need to retain some profits in the business at the end of the year -- for instance, to fund expansion and future growth. Thus, a corporation's owners can save money by keeping some profits in the company. Certain corporations are taxed on the taxable income of the company.
If this net income is distributed to shareholders , these individuals are forced to pay individual income taxes on the dividends received. Instead, a business may register as an S corporation and have all income pass-through to the business owners. An S corporation does not pay corporate tax as all taxes are paid through individual tax returns. Paying corporate taxes can be more beneficial for business owners than paying additional individual income tax.
Corporate tax returns deduct medical insurance for families as well as fringe benefits, including retirement plans and tax-deferred trusts. It is easier for a corporation to deduct losses, too. A corporation may deduct the entire amount of losses while a sole proprietor must provide evidence regarding the intent to earn a profit before the losses can be deducted. Finally, profit earned by a corporation may be left within the corporation, allowing for tax planning and potential future tax advantages.
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