TaxGuru,

I am a bookkeeper and am working on a small C corporation whose year end financials show profit. This profit is going to result in double taxation.

How can my client avoid double taxation in the current year and any suggestions for the future?

Any help would be greatly appreciated.

Dear bookkeeping,

An anticipated profit in a C corporation can be avoided by simply advising the client to take a bonus check, paying of vendors before year end, adn using the normal strategy of accelerating expenses and decelerating income.

Just ask your client to increase his salary, and also consider a SEP plan as well. Clearly, the business is doing well, and an increase in salary is a reasonable proposition to the client.

But, if my client increases his salary he will end up paying payroll taxes at 15.3% (his share and the corporation share) and additional federal and state taxes would also be withheld on his salary. This seems costly alternative...Am I missing something here??

Bookkeeping,

The alternative is to leave the profits to be taxed at the C Corporation level, and leave the residual profits within the C Corporation.

Eventually, the IRS rules on Accumulated Earnings will force you make a dividend distribution which result in double taxation of the earnings on the individual side, as these earnings were already taxed once at the C Corporation.

Taking a bonus salary or additional salary is usually the best option after considering the acceleration of expenses and deceleration of income.

I converted my C Corporation to an S corporation to avoid double taxation!

Dwhite,

This is only possible if the owners of the C corporations meet the S Corporation conversion tests!

I run a small C corporation in Missouri. This is our second year of operation. We have a $11,000 profit this fiscal year and the accountant is stating that the profits are passed down to the shareholders and they have to pay taxes on those profits.

We have issues with this as follows:
1. We have large repair expenses due to floods this year, all profits will go toward repairs and paying back loans. The profits are NOT distributed to the shareholders in any form. All profits are retained in the corp.

2. The only reference I can find to double taxation is in regards to corporate dividends. As stated in #1 above, all profits will be retained to pay repairs and loans. No dividends will be issued.

Based on the above, I'm not in agreement with the accountant - I don't believe I have to pay taxes on the corporate profits especially since I am not receiving any of the profits personally and am not distributing dividends.

And constructive advise is greatly appreciated.

The concept or idea of double taxation with respect to a Regular C Corporation is that the residual profits from this corporation are taxed at the Corporation level and not at the individual level.

The result of this is that the net income less corporate taxes paid will be classified as retained earnings. The retained earnings would be increased or decreased over the years depending on the profits or losses from the Corporations.

Now, in order for you to receive amounts that are in the retained earnings, you would need to take a dividend from the corporations. These dividends would now be taxable to you the shareholder on your personal tax return. Thus the concept of double taxation, that is these funds were already taxed on the corporation level and again when the shareholders take a distribution they are taxed as dividends.

Of course, there is no tax to you personally if you do not take a dividend distribution from the Retained Earnings account.

Thus, you are right, in that there is no direct impact to you if you do not take a distribution from the Corporation. But, the corporation will pay a corporaiton taxes based on the applicable corporate tax rate depending on the the amount of actual tax rate.

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