Tax Aspects of 'C' Corporations

In the United States, a C Corporation is a company that is incorporated and registered within a U.S. state and therefore subject to the tax code of the Federal Government and the specific State of registration. Since taxation requirements vary between C corporations and S Corporations, Limited Liability Corporations registered as S corporations, and sole proprietorships, there are several differences in how each type of company is taxed and what benefits taxation presents with each type of company.

Tax reporting requirements

A C corporation is required to file a form 1120 with the U.S. Internal Revenue Service every tax year. This tax form includes schedules A,C,E and J, K, L and M. C Corporations are subject to more tax reporting requirements than are S corporations and smaller businesses. IRS tax forms can be obtained through the Internal Revenue Website.

Tax benefits of C corporations

C corporations are subject to a sliding scale of taxation meaning the higher the income reported by the company, the greater the taxation. A C corporation may donate funds to a charitable cause to lower its tax bracket thereby saving more money that it would have lost without the charity contribution deduction.

If a C corporation is incorporated in Delaware, no State income tax is required from the corporation provided that it does not manage its business within the state. If the corporation is large enough, the no income tax policy can offset the higher franchise fees associated with incorporation in that State.

Owners of C corporations are also subject to being taxed twice due to the Corporations status as an independent tax entity. That is to say, corporate income is taxed and so are the profits paid out to shareholders in the form of dividends i.e. Owners must report those dividends on their individual form 1040's.

C Corporations like all U.S. corporations are taxed. The questions business owners or potential business owners might want to ask is how much is the tax rate, what kind of deductions are available and how can the taxes be minimized for such a company.

There are always ways to reduce taxes with knowledge of the tax system. While corporations may able to find these tax methods for themselves, tax attorneys and tax accountants may be worth the cost especially in the case of large capitalization C corporations. Three such tax related tips for C corporations are as follows:

C Corporation tax tips

• C Corporations may be better suited to own foreign subsidiaries under different tax jurisdictions than smaller companies.

• Nevada has no franchise fee or income tax for C corporations registered in its State. This can represent a big advantage in retaining earnings.

• Research business needs, requirements and plans to see which operations can yield the best tax results for a particular type of business. For example, if the company can safely operate out of Puerto Rico it may benefit from lower taxation rates overall in addition to deductions not necessarily available in the States.

• Incorporation as a 501c exempts a corporation from Federal income tax however this requires the corporation to meet certain operating guidelines. Companies operated as, religious organizations, not for profit status and or other exempt organizations may qualify as 501C(2) and 501C(3) status, each with unique tax benefits.

If a C corporation hasn't been formed yet, consider carefully which type of C corporation is right for the business and/or whether another type of corporation might be more suitable. Different types of businesses have different tax advantages, all of which may best be considered before incorporation and possibly after should the status of a company change.

Tax Aspects of S Corporations

An 'S' Corporation is a small business that has filed a Form 2553 with the U.S. Internal Revenue Service. The Form 2553 is an official corporate document representing a 100% shareholder approval of the desire to become recognized as an 'S' Corporation as governed by Section 1362 of the U.S. tax code Title 26 . Both new and pre-existing companies regulated by different tax statutes may become S corporations provided they meet the requirements.

Qualification to become an S Corporation

Form 2553 must be filed before March 15 of a given year to qualify as an S corporation for that year.
To Form a S corporation, there may only be 99 or less owners/shareholders. The Shareholders must also be legal U.S. residents. If an existing company is filing the Form 2553, that company may not be a 'C' Corporation i.e. a more formal business subject to different tax regulations.

Tax benefits and taxation of S Corporation:

S Corporations are able to avoid what is known as 'double taxation'. Double taxation is when profits a company earns are taxed, and then the profits distributed to the owners are taxed again on their individual tax forms. S corporations avoid this by not always having to pay tax on earnings. Instead, as with Limited Liability Corporations, those earnings or losses are either added to or deducted to the shareholder's personal income.

Another tax benefit of S corporations is the ability of the corporation to pay dividends. Dividends are profits that are passed on from companies to shareholders. Since dividends are not taxed the same way as employee income, S corporations can avoid paying extra federal employment taxation, thus saving money.

IRS tax forms for S Corporations:

The tax forms required of S corporations by the Internal Revenue Service include the following. These requirements can be viewed at the Internal Revenue Service website.

Form 1120S: The company's tax documentation form
Form 941 or 943: Employment taxes withholdings
Form 940: Additional employment withholdings such as social security, Medicare etc.
Form 1040: Individual Tax documentation for shareholders

TIPS on Becoming an S Corporation:

Check State laws regarding S Corporations, as they may not recognize S corporations the same way the Federal Government does, thereby excluding them from the same taxation rules applied at the Federal level.

Paralegal services may be all that is needed to set up an S corporation if a company does not do so independently. Tax accountants and/or attorneys specializing in taxation law may also be of assistance in certain situations.

According to Title 26, Code 1362 of the U.S. tax code, an S corporation is no longer a S corporation if the company no longer meets the requirements of a S corporation or if the company earns a specific amount of income after 3 years i.e. more than 25% of total revenue over 3 years.

Forecasting your corporations growth, needs, size and capitalization requirements may be useful when determining if an S corporation is the right classification for your business. This may be beneficial as if the company outgrows itself, it may have to change its tax status causing added complications in the future.

If a company pays out all its earnings as dividends, it may not have to withhold income tax if there are no salaried employees, thereby avoiding double taxation. This would make formation as an S corporation not as attractive if it is formed entirely on the premise of avoiding double taxation.

Deciding whether or not to form an S corporation or switch to an S corporation from an LLC or sole proprietorship may not be a decision one makes in a couple of minutes over a coffee. There are several aspects of earnings distribution, taxation code, number of employees and corporate forecasting that may all impact the benefits of such a decision. S corporations are generally have less responsibility in terms of IRS regulations than do C corporations. In spite of this, C corporations may have its unique advantages over an S corporation such as charitable contributions tax deductions exclusive to the C corporation.