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Tax Tip of the Week | No. 432 | C Corporation November 8, 2017

Posted by bradstreetblogger in : General, Tax Planning Tips, Tax Tip, Taxes, Uncategorized , trackback

Tax Tip of the Week | Nov 8, 2017 | No. 432 | C Corporation

A C Corporation is the most common type of corporation in the United States.

Along with LLC’s, S Corporations, certain trusts and limited partnerships, C Corporations offer limited liability protection. That feature is important in today’s litigious times. The C Corporation generally protects its shareholders from personal liabilities arising from the business. Other entities, such as general partnerships and sole proprietorships, do not provide such limited liability protection to their owners.

A C Corporation is its own tax paying entity. Many other entities are known as pass-through entities since their taxable income flows through and is taxed on the personal income tax returns of the owners.

The top tax bracket for C Corporations is 34% up to the first $10 million of taxable income. A surtax exemption phase-out occurs on taxable income ranging from $100,000 to $335,000. So once $335,000 of taxable income is reached the corporate income tax bracket is a flat 34% since the lower brackets are no longer considered. For comparison purposes, the top income tax bracket for an individual is 39.6%. Since the top C corporation tax rate is less than the top individual tax rate, this may at times make the C Corporation tax structure more attractive than the pass-through entity structure. Also, since these tax savings may be retained inside the C Corporation at a lower tax rate, this feature may be advantageous for those companies expected to be passed on to future generations.

Another tax aspect of C Corporations is that capital losses may only be deducted to the extent of capital gains. Any remaining net capital loss may be carried back 3 years and forward up to 5 years. That may sound unfair but it is not very different from individuals who may only deduct capital losses up to their capital gains plus $3,000 annually. However, any unused capital loss at the individual level may be carried forward up to the time of death.

As part of its structure a corporation is responsible to hold shareholder and director meetings. Failing to do so may give someone the ability to pierce the corporate veil and cause the shareholders to lose their limited liability protection for their personal assets.

Sometimes C Corporations get an undeservedly bad rap from the press because of potential double taxation that may occur in two areas. The first area involves payment of corporate dividends to shareholders.  These dividends are taxable to the shareholder but not deductible by the C Corporation, creating double taxation. The second area is in the event of a liquidation of the C Corporation. Here, a gain may be taxed at the corporate level and again at the shareholder level as the liquidating dividends are paid. However, the possibility of these double tax scenarios may, at times, be avoided if no dividends are paid or the corporate stock is sold as opposed to a corporate liquidation.

All this being said, Congress is considering making some significant revisions to the tax law surrounding C Corporations. Many of their current proposals could make C Corporations more tax attractive and possibly reverse the current trend away from the formations of S corporations and LLCs. However, what Congress may eventually decide is anyone’s guess.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.

…until next week.

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