Most people have one of two opinions about C Corporations: They love them or they hate them.
If you love them, make sure you’re aware of the potential traps of C Corporations. They work great in the right circumstances and can be disastrous if you use them incorrectly.
But today I want to talk about one of the myths about C Corporations. I keep running into people who quickly say the dreaded two words when it comes to C Corporations as to a reason why they shouldn’t have them.
Those two words are “double taxation.” It’s the most commonly given reason for not taking advantage of the special tax breaks and benefits you can get with a C Corporation. But the reality is that there are reasons why you shouldn’t have a C Corporation, but double taxation is rarely one of them.
The term ‘double taxation’ refers to what happens when a C Corporation pays out a dividend. The dividend is paid from after tax income of the Corporation. It is not deductible. So tax is paid once. Then the owner has to pay tax on the dividend income that is received.
Salary is not subject to double taxation. That’s because it is paid out of before taxable income. It IS a deduction for the corporation. So even though it’s taxable to the recipient, it’s a deduction for the corp so there is only tax once.
Benefits are not subject to double taxation. In most cases, the benefits are a deduction for the corporation plus they are not taxable to the recipient. So it’s the best of all words – no tax for anybody.
The only double taxation a C Corporation has occurs when dividends are paid.
If you want to avoid double taxation, the best strategy is to set up your C Corporation so you don’t ever have to pay out dividends.