What is double taxation on corporations?
You’ve heard about it, but what does double taxation mean? Corporation double taxation describes a situation in which business owners pay income taxes twice on the same earnings.
The implications and double taxation definition are poorly understood. This potential financial hazard may be a drawback, but corporations still receive plenty of benefits that offset:
- Corporation may issue and sell stock to generate funds
- Shareholders are indemnified against liabilities
- Intrinsic management structure organizes decision making
- Many interested parties may pool resources on a venture
In exchange for these advantages, your firm must follow laws and pay all required taxes including the dreaded corporate double tax.
Corporate Income Taxes
Profit is taxable as income after eligible expenses are deducted from revenues. The federal government establishes the taxable rate for corporations and the IRS collects those taxes every year. Corporations failing to pay income taxes are subject to legal penalties which may include criminal charges.
Tax on Dividends
A shareholder owns a portion of a corporation in the form of stocks. Stocks may be sold, traded, or purchased as property. As the business grows and becomes profitable, the value of the stock also increases, but there is another way investors may profit from their shares.
A corporation can divide up its annual profits and pay each shareholder a portion. This payment is called a dividend. Dividends are a form of income for the shareholders, but they are not considered an eligible business expense.
The Math on the Double Tax
Money distributed as dividends gets taxed twice. It is taxed as profit under the corporate income tax and it is taxed again as income when reported by the individual shareholders.
Many companies choose to reinvest earnings into growth rather than pay dividends. Others avoid double taxation by paying higher wages instead of dividing profits.
Getting Help with Your Corporation
A corporation is a great way to expand your business’s capabilities, and GovDocFiling can help. Get your tax filings current with our online S-corp EIN number application or start your filing for a C-corp business status.