It is one thing to not like paying taxes. However, one gets filled with rage when they have to pay double taxes on the same income. Some businesses are required to pay taxes twice in the same period under the IRS tax policy of double taxation. If you own a business in California, it is important that you know what it is and what you can do to save your money.
Sadly, if double taxation applies to your business, there is nothing you can do to avoid it. To learn more about this and keep your finances in order, hire a CPA in Solana Beach, California, today. Read this blog to learn the basics of double taxation.
What is double taxation?
Just as the term implies and is mentioned in the introduction, double taxation is the act of paying taxes twice on the same income in the same time period. It occurs in three types of scenarios:
- Income from corporations: C corporations are required to pay taxes at both the corporate and shareholder levels. The corporation pays taxes on its profits, and the shareholders pay taxes on their individual income from the dividends they receive.
- International trade or investments: Some businesses may earn profits internationally while being headquartered somewhere else. Without an agreement in place, businesses may need to pay taxes in both countries.
- Traditional IRAs with after-tax contributions: Traditional IRAs may include after-tax contributions along with pre-tax contributions.
Which business entities experience double taxation?
C-corporations or C-corps are the only business entities that have to pay double taxes. Other entities have a way to avoid paying two times.
To avoid paying double taxes, it is important to structure your business properly. Instead of structuring your business as a C-corp, you can structure it as a pass-through entity, like a sole proprietorship, an LLC, a partnership, or an S-corp. In such organizations, all of the income goes to the sole owner of the business, and only personal income taxes are required to be paid.
Are there any advantages to structuring as a C-corp?
Yes, there are various advantages to structuring your business entity as a C-corp. The main three benefits are as follows:
- You do not have to pay self-employment taxes on profits.
- You get to enjoy tax-free benefits on retirement plans and insurance.
- The tax rate of 21% may be lower than your individual income tax rate.
Do not let double taxation catch you off guard with the IRS. Hire a CPA today to get tailored strategies for taxes.