Michigan

Tax Pitfalls of Michigan C Corporations

My last post may have given the impression that everyone should be rushing out to structure their business as a C corporation. So, in this post, I thought I would follow up with some cautionary information regarding some of the negative tax aspects of running a business as a C corporation.

These negatives include the following:

1. Double taxation. C corporations are taxed on corporate income and then shareholders are also taxed on distributions the corporation makes to them. But, a well-advised smaller C corporation should never have to pay corporate income tax because there are legal techniques to reduce its corporate level income tax to zero by paying appropriate salaries, bonuses, and fringe benefits.

2. C corporations are subject to the personal holding company tax. Basically, this is a penalty tax that the IRS imposes on corporations the IRS regards as an incorporated investment account. Active businesses shouldn't have to worry about this tax, as it targets corporations with 60% or more of their income coming from investments (i.e., dividends and royalties).

3. C corporations must deal with an accumulated earnings tax. This cuts into the C corporation's advantage over other entities to accumulate its profits to fund growth. The IRS imposes this 15% tax on C corporations that accumulate earnings in excess of $250,000.

4. C corporations are subject to the corporate alternative minimum tax. C corporations can be hit with this tax if they take advantage of certain out of the ordinary tax preference items such as income from life insurance or by postponing tax obligations by using the installment method of tax reporting.

Luckily, these four tax disadvantages are unlikely to pose much of an issue to smaller C corporations. So, companies that have net annual income over $100,000 should check with a qualified business lawyer or tax adviser to see if operating as a C corporation might be right for them.

Full post as published by Michigan Business Lawyer Blog on January 16, 2008 (boomark / email).