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What Is Double Taxation?

Double taxation refers to paying personal taxes on revenue already taxed at the corporate level. The prospect of double taxation daunting, but it is an avoidable problem. Let’s examine how it works:

 

Corporate Entity

First, a C-Corp doesn’t pay taxes on every dollar it earns. Rather, C-Corps deduct their operating expenses from their revenues, reducing the business’s taxable income. So if a company brought in $100,000 in revenue for a fiscal year but spent $65,000 in operating expenses, the taxable income of the business is $35,000, not $100,000.

 

Shareholders

Second, shareholders in a C-Corp only get taxed if dividends are distributed to them by the company. If a C-Corporation chooses not to provide dividends to shareholders and instead retain profits, double taxation is avoided since no dividends exist. In other words, only if a C-Corp makes a profit and distributes dividends to shareholders will double-taxation come into play.

 

All C-Corps are required to complete and return IRS Form 1120. This informs the IRS of your C-Corp’s income, gains, losses, deductions, credits and income tax liability.    

 

If you’re not sure a C-Corp is right for you, feel free to read our article about how S-Corps are taxed or the differences between S-Corps and C-Corps. You can also visit our Incorporation Learning Center for more information.