Why S Corporations Are Still Advantageous for Small Business Owners, Part 3 – Los Angeles Income Tax Planning and Income Tax Litigation Attorney Bruce Givner

by Bruce Givner on February 19, 2014

In the previous 3 installments on this topic, we have learned a few important reasons why recent changes to the tax code do not take away some of the major benefits provided to small business owners by filing as S corporations.

To recap: the American Taxpayer Relief Act, signed into law in January 2013 in order to avoid the “fiscal cliff,” raised the highest individual income tax rate to 39.6% while leaving the highest corporate tax rate at 35%. Due to the pass-through nature of S corporations, small business owners have begun to wonder whether it would be more beneficial to revoke their election under Subchapter S of the Code? In the final part of our series of blogs on this topic, we will discuss one more reason why this is not the case.

Unlike S corporations, C corporations face what is called “double taxation.” First the profits generated by a C corporation are taxed to the corporation when earned. The profits are then taxed a second time to the shareholders when distributed as dividends. The corporation cannot deduct dividend distributions and shareholders cannot deduct losses of the corporation.

S corporations, however, do not face this double taxation. Indeed, this is one of the major benefits of S corporations. While S corporations are not taxed, themselves, the income, losses, deductions, and credits are passed directly to the shareholders who then report income and losses on their personal tax returns. Therefore, shareholders in S corporations are only subject to the individual income tax rate.

As has been made apparent by the previous blog posts on this topic, decisions regarding the type of business entity for your company can be very complicated. While superficial examinations of the tax rates and the differences between entity types may lead a small business owner to favor one designation over another, it is vital that these owners make sure to take into account the full tax picture before making any final decisions. Due to the complex and changing nature of the tax code, small business owners would do best to consult with an experienced tax professional who can help them analyze all the relevant scenarios in order to determine what type of entity is most advantageous for them.

Givner & Kaye focuses on sophisticated income tax planning and compliance, tax litigation and procedure, estate planning, and asset protection plans for individuals and businesses in Beverly Hills, Calabasas, West Los Angeles, Hollywood, and other areas of Los Angeles, Orange, Ventura, San Bernardino, Riverside and Santa Barbara Counties. Call Los Angeles Estate Planning and Asset Protection Plan Attorneys Givner & Kaye at (310) 207-8008 today.

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