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When C Corporations Save Your Business Taxes

Article Summary: Many small businesses assume that limited liability companies and S corporations are the only good choices for the business ventures. But a regular C corporation may sometimes be the best choice.

A business typically reduces income taxes by choosing to be taxed as a sole proprietorship, partnership or S corporation--or as an LLC taxed as sole proprietorship, partnership or S corp.

However, even though C corporations may cause a business to pay a second level of tax on business profit, a C corporation may save the small business owner taxes in at least three situations.

C Corporations Allow for Richer Fringe Benefits to Owners

With sole proprietorships, partnerships and S corporations, the tax-free fringe benefits available to owners are very limited. Sole proprietors, S corporation shareholder-employees, and partners can write off medical insurance and retirement account contributions. But not much else.

In comparison, a C corporation can typically provide the same tax-free fringe benefits to owners as it provides to rank-and-file employees. These additional non-taxable freebies can include housing, educational assistance, life insurance--and several other items as well.

A C corporation may also allow a business to provide better healthcare benefits for shareholder-employees. Though not the case for sole proprietorships, partnerships and S corporations, a C corporation might be able to discriminate in favor of corporate officers or shareholder-employees and provide them with better or more healthcare benefits.

C Corporations May Minimize Income Taxes on Reinvested Profits

All of the profit of a sole proprietorship, partnership or S corporation gets allocated to the business owner or owners and then taxed on their personal income tax returns. In effect, the last dollars of business profit--money that's probably reinvested in the business--get taxed at the owners' high marginal tax rate.

And that rate can be crushing. The top marginal tax rate on a small business owner can easily be forty or fifty percent when you combine federal and state income taxes and any self-employment taxes. A sole proprietorship, S corporation or partnership may pay as much as $20,000 in income taxes if it reinvests $50,000 of profit in the business.

Modest amounts of C corporation profit, however, get taxed at modest rates. For example, the first $50,000 of a C corporation's profit is typically taxed at rates of 15% to 20%. A C corporation reinvesting $50,000 of profit may pay more like $10,000 in tax.

C Corporations May Reduce Out-of-State Taxes A business that operates in multiple states typically pays taxes not just to its own home but also to the other states where it employs people, holds property or provides services or sells products.

A business pays taxes to all of the states in which it operates because tax laws require businesses to apportion or allocate their business profits among the states of operation.

In practice, however, small C corporations siphon off most of all of their business profit in the form of salaries and tax-free fringe benefits. That means a small C corporation typically has less, "left-over" business profit. And less business profit means less state income tax.

Article Source: http://www.upublish.info

About the Author:
Stephen Nelson
Seattle tax accountant Steve Nelson specializes in small business taxation. The author of Quicken for Dummies, he also edits the do it yourself incorporation and llc formation web sites.