From a tax perspective, a C corporation is a unique animal.
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It is the only business structure that is not a pass-through entity. In sole proprietorships, partnerships, and S corporations, income and liabilities are passed on to the business owner(s). But in a C corporation, the company is a taxable entity with its own income and IRS status.
C corporations file their own tax returns and pay corporate income tax on the net income they earn after expenses have been deducted from gross revenues. A corporation's taxable income essentially represents the money that will be held in the corporation for future expenses and the profits that are distributed to shareholders as dividends.
But one of the big disadvantages of a C corporation is that distributions to shareholders are taxed a second time, reported as dividend income on the shareholders' personal income tax returns. This "double tax" sets C corporations in stark contrast to pass-through entities (i.e. sole proprietorships, partnerships, S corps) in which income is only taxed once.
However, C corporations can also offer a few tax advantages for a business. Here are some benefits to think about:
- Tax rate flexibility. C corporations are the only kind of business that can divide their earnings between dividends and retained earnings. This gives the company flexibility in determining how much income will be distributed to shareholders and how much will stay with the corporation, giving owners more flexibility in determining tax rates.
- Carry-back & carry-forward losses. C corps also benefit from the unique ability to offset prior year profits with current year losses. The IRS allows C corporations to carry back net operating losses two years, which allows the business to recover taxes that were paid during those previous two years. Even better, losses not carried back to the previous two years can be carried forward for the next twenty years.
- Fringe benefit deductions. Yet another tax benefit of a C corporation is that it can deduct 100% of the health insurance it pays for its employees, even if those employees are shareholders in the corporation. Other deductible fringe benefits include medical reimbursement plans, qualified education costs, group term life insurance up to $50,000 per employee, employer-provided vehicles and public transportation passes.