Provided to you by Marvin Mowatt, CPA
Tax Advantages of Operating a Corporation
Corporations are afforded a series of tax benefits and advantages by the tax code that are not available to sole proprietorships and other forms of small business. The following tax benefits may or may not apply to your company. In particular, some of the benefits described apply only to C-Corporations, whereas others apply only to S-Corporations. Please seek proper advice as to which entity is appropriate for your particular needs.
The ability to divide income between the corporation and its shareholders in a manner that lowers overall taxes is referred to as Income Shifting. This practice is by far one of the greatest benefits of operating a C-corporation. Profitable small businesses with shareholders in higher tax brackets stand to benefit the most from the practice of income shifting.
A C corporation tax treatment allows a corporation to retain earnings to fund research and development and to expand its product line. Profits retained within a corporation are taxed at the initial tax rate of only 15%. The ability to retain earnings within the business, without imputing tax liability to shareholders, provides valuable tax savings to growing corporations that are not available to other business types.Fringe Benefits
Tax on Dividends
The capital gains treatment of dividends is increasing the selection of the C corporation as an entity type. Under prior law, dividends were taxed as ordinary income. The maximum tax rate was 38.6%. The new law provides that dividends from domestic corporations are taxed at the long-term capital gain rates (that is, 5% or 15%). These rates apply to tax years 2003-2007. In 2008, the 5% rate drops to zero. (The 15% rate is unchanged in 2008.) After 2008, dividends will again be taxed at ordinary income tax rates. To qualify for the special treatment, the shareholder must hold the qualifying stock for more than 60 days during the 120-day period beginning 60 days before the ex-dividend date
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