If you’re the owner of a small C corporation in America, you’ll likely know all about double taxation. Occurring when the same income is taxed both at corporate level, and at the individual level when profit distribution as dividends takes place. For many small businesses, this can be something of a burden financially, hampering their capacity to reinvest profits and experience growth.
As a small business owner, working with a professional service providing tax planning in Coral Gables is the best way to get to grips with double taxation, find strategies to avoid it, and maximize your company’s financial efficiency.
Here are some effective strategies for avoiding double taxation:
Select the right business structure
By choosing S corporation, Limited Liability Company (LLC) or partnership status when selecting a business structure, you can avoid double taxation.
With income passed through to shareholders as a S corporation, and then taxed at the rates of the individual, federal corporate income taxes can be avoided, to leave just one taxation layer.
LLCs can opt to be taxed as a partnership, S corporation, C corporation or sole proprietorship. The majority of LLCs choose pass-through taxation as a partnership, or sole proprietorship, whereby personal tax returns are used for reporting business income.
While partnerships can also take advantage of pass-through taxation, in which profits are only taxed at the level of the individual partner.
Retain earnings
If you choose a C corporation structure, instead of having to distribute earnings as dividends, you can retain them, meaning that shareholders don’t have to pay personal taxes on dividends, and the corporation pays tax on the earnings, mitigating double taxation.
But while this can be an effective strategy, having guidance from a tax expert is recommended, as if a corporation retains earnings that are beyond what the IRS believe to be reasonable business needs, they could face additional taxes on accumulated earnings.
Pay a salary to owner-employees
Paying a salary to owner-employees is another double taxation-avoidance strategy that can be effective. Since salaries can be deducted as business expenses, the taxable income for a corporation is reduced. Again, guidance from a tax professional when using this strategy is strongly recommended, as the IRS may scrutinize salaries that aren’t deemed reasonable.
Use fringe benefits
Health insurance, education assistance and retirement plans are all fringe benefits that are tax-deductible to owner-employees of C corporations. Deductible for the corporation rather than the employees, this reduces taxable income and avoids the issue of double taxation.
Borrow money rather than distributing dividends
Instead of dividends, loans can be received from the corporation by shareholders, deferring personal income tax liability. But it’s important to keep in mind that the structure of the loan must be such that it’s legitimate, and there’s a reasonable expectation of it being repaid, otherwise the IRS could reclassify it as a dividend.
Reinvest profits
Helping to reduce corporate level taxable income, businesses can reinvest their profits in such things as research and development, or expansion. As with all of these strategies, help from professionals providing bookkeeping in Miami services, as well as tax advice and guidance, is highly recommended.
Worried about double taxation as a small business owner? By taking the time to understand the different tax implications of the business structures available, and talking to a tax expert about strategies to minimize your tax burden – such as those listed above – you can do your best to avoid double taxation, legitimately.
