C corporation tax

C corporation has many tax advantages but there are also tax disadvantages to watch out for when incorporating a business as a C corporation. C corporation tax issue of double taxation of C corporation is discussed in this section of How to incorporate business information website.

Double taxation of C corporation tax

Double taxation occurs when dividends are paid. Most business expenses that a C corporation pays are deducted against income of the C corporation, thus avoiding double taxation.

What are liquidating dividends?

Liquidating dividends are dividends paid by a corporation when the corporation is liquidated. When a corporation is in liquidation, it sells off all of its assets and then the corporation is dissolved. The business owner of the corporation will receive something the IRS calls a liquidating dividend.

There is no more deductions for the corporation since it no longer exists. The owner of the recently dissolved corporation will have to pay tax on the gain from the sale of assets and the owner of the corporation will also pay personal tax for the dividend income received.

How to avoid double taxation by dividends

Double taxation from dividends can occur when a corporation does not have proper documentation. If benefits are paid on behalf of the shareholders without the proper plans in place and without proper documentations such as corporate resolutions and filing systems, the IRS will determine that the benefits are really dividends are tax them as dividends. Proper documentations can help business owners avoid double taxation by dividends.