no dbl-taxation on S-corp?

One of the touted advantages of converting from a C-corp to an S-corp is to avoid double taxation.
But when the dividend/distribution passes through to the owner's 1040
return, it doesn't pass-through to there tax-free... the owner will still have to pay a tax on it subject to his overall personal tax situation (how much he earns elsewhere, how many deductions he has, etc...)
So though the C-corp itself doesnt face double-taxation, the money still gets taxed twice... do I have this right? So what's the big advantage that has made S-corps so popular?
Thanks for any help.
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On 25 Apr 2007 19:40:48 -0700, snipped-for-privacy@yahoo.com wrote:

With C-corporations, the business is taxed on the entire net income at a corporate level. Shareholders are personally taxed on distributions only.
With S-corporations, shareholders are taxed their proportionate share of the business' net income regardless if any distributions are made.
If all income were distributed to shareholders and all other things were the same, S-corporation shareholders would have more to keep in their pocket. It breaks down like this on a percentage basis (percentages are not actual percentages and used for illustration purposes only):
C- corp net income before taxes = 100 Corporate tax = 25 net income after taxes and distributed = 75 Individual tax on distributions = 25 Shareholder keeps = 50
S- corp net income before taxes = 100 Individual tax = 25 Shareholder keeps = 75 Beverly
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C Corporations pay tax on their corporate profits. When/If dividends are paid to the shareholders they are taxed at the shareholder level. Hense the term "double taxation". You can avoid any double taxation by paying all the profits out in salary, or, not paying dividends at any time.
S Corporations do not pay tax on their corporate profits. Instead, they are passed through pro-rata to the shareholders (regardless of what was paid to the shareholders) and are taxed - once - there.
The biggest draw to "S" corporations is that the profits are taxed for regular income tax, but do not get taxed as wages or as self-employment tax, thereby avoiding the SE tax paid by self-employeds and partners.
Take $80,000 of net profits in a partnership or sole-proprietor and flip that number into "S" profits. Pay out $50,000 as wages leaving $30,000 in profits that bypass the SE tax - a tax savings of about $4500.
There is some abuse along that line in that some "S" shareholders are not taking any salary, or that it's so small as to be deemed "unreasonably low". The IRS and Congress are looking at "S" abuses and are considering making "S" profits subject to SE tax.
--
Paul A. Thomas, CPA
Athens, Georgia
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