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Double Taxation is a huge
drawback of a "C" Corporation. After the
corporation pays its income tax, the owners may not take that remaining
profit without the imposition of another tax at the shareholder level.
Dividends to shareholders are taxed to those shareholders as ordinary
income. See Planning Ideas for
possible ways around this rule.
Accumulated Earnings Tax is an additional tax imposed only on "C"
Corporations who accumulate profits in the corporation that are deemed
"unreasonable." A corporation is allowed to accumulate
profits for future
expansion, or for another bona fide purpose, but if a corporation
accumulates
its earnings in excess of what is deemed reasonable, then it is subject to a
39.6% Accumulated Earnings Tax, which is in addition to its regular income
tax. As a general rule, and there are many variations, retained
earnings in
excess of $250,000 ($150,000 for professional corporations) are deemed
unreasonable.
Capital Losses on the sale of another corporations stock are not allowed for
"C" Corporations. Corporate stock losses are only
deductible against
capital gains of the corporation. This is a major drawback for a
corporation
and must be weighed against the Dividends Received Deduction
when a
corporation is evaluating investing in another corporation's stock.
A "C"
Corporation may carry back a capital loss 3 years and may carry forward a
capital loss 5 years, to offset the loss against a future capital gain.
These carry forwards and carry backs help alleviate the drawback of no deduction for
capital losses.
Constructive Dividends affects many closely held corporations and results in
income tax to the shareholder. The IRS may in various circumstances
and
under various scenarios, deem that the shareholder received a
"constructive
dividend" from the corporation, and thus assess income tax to the
shareholder
on that dividend. Some of these various circumstances could be in the
case
of an IRS disallowance of a corporate deduction that was deemed for the
benefit of a shareholder, such as an entertainment deduction, a tax free
loan
to the shareholder, rent paid to a shareholder, unreasonable compensation
for
a shareholder employee, gifts to a shareholder, or for a purchase or sale
transaction between a shareholder and the corporation.
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