It’s certainly not everyone’s favorite topic, but having a firm grasp on your tax situation as a startup is key for future growth. While some companies choose to incorporate themselves as an LLC or S corp right off the bat, some opt for the route of becoming a C corp instead. You may have heard rumors about the stipulations involved in C corporation taxes, but we’re here to set the record straight. Let’s take a look at both the tax advantages and disadvantages of formalizing your organization as a C corp.
C Corporation Tax Rates
As recently as a few years ago, it wasn’t overwhelmingly desirable to operate as a C corp due to rather high tax liability. Even in 2017, the C corporation tax rates hovered around 35%, thus cutting into a huge chunk of a company’s profits. Thankfully, a new bill in 2018 lowered the rate to 21%, and experts are estimating that it will stay at this lower percentage for a while. While many startups have become more inclined to reap the benefits of this lower rate, you still need to consider that just over one-fifth of every dollar you earn will go to the IRS.
Others in the startup space are hesitant to identify as a C corporation not only because of the tax rate associated with it but also because of the idea of double taxation. If you’re the owner of a C corp, double taxation means that your business will get taxed on any earned income and your personal salary (whether paid out in dividends or as an employee) will also be taxed on your individual tax return.
When you’re the one paying C corporation taxes it’s easy to feel like you are getting taxed twice, however, others note that this concept doesn’t really collect double taxes as two different entities are being held liable for their payments. Whether you feel like C corp double taxation is a myth or not, it doesn’t change the fact that there’s often a lot of money going out your front door.
Are There Any Positives?
So far it sounds as if startups should avoid becoming a C corp at all costs, but there are actually a plethora of C corporation tax advantages to consider. Some of them include:
- Writing off bonuses and salaries of your shareholders, as long as they work as an employee of the company. C corps can even make substantial payroll payments to the point where little to no taxable income remains at the end of the fiscal year.
- Greater flexibility in determining your fiscal year, allowing owners to time shareholder distributions carefully in order to create a more favorable tax situation.
- The option of writing off medical premiums, disability insurance, and health reimbursement plan costs for all employees. While the owners of an S corporation could do the same, they have to claim the benefits as income on their personal taxes and it ends up being a wash.
- Greater forgiveness from the IRS when carrying forward losses across multiple years.
- More flexibility in their ownership structure, which not only creates a more favorable situation for C corp taxes but can also be more attractive to potential investors.
While formalizing your business as a C corp has its fair share of both advantages and disadvantages when it comes to tax time, there’s a lot more to think about than just the IRS. A C corporation utilizes a specific business structure when it comes to ownership and shareholders and of course, lays the groundwork for going public as a company grows. Depending on your specific goals, you might find this to be the best option for you, or some of the less stringent details of an S corp or an LLC may be more appealing.
Ultimately, if you do decide to start your business as a C corp from the get-go or want to transition to one down the line, it’s essential that you understand the tax ramifications that go along with it. If you need assistance in any area of your startup’s finances from payroll to advanced bookkeeping, all with the goal of setting yourself up for success with the IRS, contact airCFO today. Our team is well-versed in C corp tax requirements and can help you to remain profitable while meeting your tax obligations.