Tax Planning - VI. Corporations

The Different Corporation Entities

S Corporation

Advantages of S Corporation

  • Income-splitting among up to 100 investors
  • Pass-through of income and losses, up to basis
  • No self-employment tax on earnings
  • No accumulation earnings tax or reasonable compensation limit

Disadvantages of S Corporation

  • Built-in gains tax
  • LIFO recapture
  • Excess net passive income tax
  • Benefits are taxable to the employees who are 2% shareholders

Other Considerations for S Corporations

  • 1244 stock losses are deductible as ordinary losses (max. of $100,00 for joint filers)
  • Basis in the stock is increased for share-holder loans to the corporation, but not for increases in corporate liabilities

C Corporation

This type of corporation is owned by its shareholders, who elect a board of directors. The board of directors are responsible for managing the business.

Advantages of C Corporation

  • Dividends and capital are taxed at low rates to shareholders
  • Income taxed at rates of separate tax entity
  • Exclusion for 70% of dividends received
  • Deductible employee benefits
  • Passive losses are deductible against active income

Disadvantages of C Corporation

  • Double taxation of earnings and in liquidation
  • AMT applies unless it is a small corporation
  • Compensation must be reasonable
  • Accumulated earnings tax applies
  • Capital gains are taxed as ordinary income to the corporation

Other Considerations for C Corporations

  • 1244 stock losses are deductible as ordinary losses (max. of $100,000 for joint filers)
  • Net operating losses can be carried back 2 years and forward 20 years
  • ISOs are taxed at the capital gains rate

Formation

A C Corporation is formed by filing an Articles of Incorporation with the state. These corporations also require formalities such as: bylaws, minutes, and corporation resolutions.


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