Law Outlines Corporate Tax (Duke Zelenak) Outlines
Corporate Tax outline for Professor Zelenak from Duke Law...
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C corporation: Corporations subject to the double tax regime under Subchapter C.
Corporation has 100 income - 100*35% corporate tax tax=65
65 - 65*20% tax on dividends on shareholders=52
Double tax v. single tax
Sometimes the double tax is good
E.g. 50k corporate income, tax 15%, 42.5k after tax
Pay 42.5% dividends, at 20% capital gains rate, 34k after tax
Combined effective tax rate is 32%.
Single tax would be 39.6%
Strategies eliminating shareholder tax
Not distribute the earnings, let the corporation to keep the money
In closely-held situations, corporate tax rates are usually 34%, whereas the shareholder tax rate is usually 39.6%, so it’s better not to distribute.
Section 302, shareholder selling back shares to corporation and recover basis
non-meaningful redemption (one that does not change shareholders’ percentage of shares) treated as dividends, and no basis recovery
E.g. Corporation X, A and B shareholders, each has 50% shares, each sells back 20 shares to the corporation, A and B still each has 50% shares.
Meaningful redemption, basis recovery (treated as a sale)
If A sells back all his shares, B still holds shares, after redemption, B owns 100%
The owner dies, basis step up to FMV. Section 1014 (step up basis) and section 302 (basis recovery) work together to eliminate tax on dividends.
Strategies eliminating corporate level tax
In closely-held context, shareholders are also employees (double hats), so the corporation can just pay dividends in the forms of salary or bonus.
Bad news is you are then taxed at higher income tax rates
Good news is you get rid of double tax and wipe out the corporate level tax
Limited to closely-held corporation
Subchapter S election
Small business corporations can elect to be taxed under a conduit approach similar to the taxation of partnership, and therefore eliminate the corporate tax
But shareholders are taxed on the corporation’s retained earnings, in proportion to their stock holdings
Corporation can make S election only if
it has no more than 100 shareholders who are not nonresident aliens, estates or certain trusts, and
the S corporation may not have more than one class of stock.
limited to closely-held corporation
Don’t be a corporation at all, elect to be a LLC
LLCs are treated as partnerships for tax purposes, therefore LLCs avoid the double tax on corporate profits while obtaining limited liability for all the owners of a business
This choice is...
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Corporate Tax outline for Professor Zelenak from Duke Law...
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