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Wednesday, April 13, 2011

Tax aspects of 'C' corporations

In the United States, a C Corporation is a company that is incorporated and registered within a U.S. state and therefore subject to the tax code of the Federal Government and the specific State of registration. Since taxation requirements vary between C corporations and S Corporations, Limited Liability Corporations registered as S corporations, and sole proprietorships, there are several differences in how each type of company is taxed and what benefits taxation presents with each type of company.

Tax reporting requirements

A C corporation is required to file a form 1120 with the U.S. Internal Revenue Service every tax year. This tax form includes schedules A,C,E and J, K, L and M. C Corporations are subject to more tax reporting requirements than are S corporations and smaller businesses. IRS tax forms can be obtained through the Internal Revenue Website.  Tax reporting requirements of C Corporations are discussed in greater detail in the following video:

Tax benefits of C corporations

C corporations are subject to a sliding scale of taxation meaning the higher the income reported by the company, the greater the taxation. A C corporation may donate funds to a charitable cause to lower its tax bracket thereby saving more money that it would have lost without the charity contribution deduction.

If a C corporation is incorporated in Delaware, no State income tax is required from the corporation provided that it does not manage its business within the state. If the corporation is large enough, the no income tax policy can offset the higher franchise fees associated with incorporation in that State.

Owners of C corporations are also subject to being taxed twice due to the Corporations status as an independent tax entity. That is to say, corporate income is taxed and so are the profits paid out to shareholders in the form of dividends i.e. Owners must report those dividends on their individual form 1040's.

C Corporations like all U.S. corporations are taxed. The questions business owners or potential business owners might want to ask is how much is the tax rate, what kind of deductions are available and how can the taxes be minimized for such a company.

There are always ways to reduce taxes with knowledge of the tax system. While corporations may able to find these tax methods for themselves, tax attorneys and tax accountants may be worth the cost especially in the case of large capitalization C corporations. Three such tax related tips for C corporations are as follows:

C Corporation tax tips

• C Corporations may be better suited to own foreign subsidiaries under different tax jurisdictions than smaller companies.

• Nevada has no franchise fee or income tax for C corporations registered in its State. This can represent a big advantage in retaining earnings.

• Research business needs, requirements and plans to see which operations can yield the best tax results for a particular type of business. For example, if the company can safely operate out of Puerto Rico it may benefit from lower taxation rates overall in addition to deductions not necessarily available in the States.

• Incorporation as a 501c exempts a corporation from Federal income tax however this requires the corporation to meet certain operating guidelines. Companies operated as, religious organizations, not for profit status and or other exempt organizations may qualify as 501C(2) and 501C(3) status, each with unique tax benefits.

If a C corporation hasn't been formed yet, consider carefully which type of C corporation is right for the business and/or whether another type of corporation might be more suitable. Different types of businesses have different tax advantages, all of which may best be considered before incorporation and possibly after should the status of a company change.