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,
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.
On 25 Apr 2007 19:40:48 -0700, email@example.com wrote:
With C-corporations, the business is taxed on the entire net income at
a corporate level. Shareholders are personally taxed on distributions
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
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
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.
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