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When operating a business the calculation of taxable income is important as it is the basis...

When operating a business the calculation of taxable income is important as it is the basis for determining the amount of tax that must be paid on the income of the business.

How is taxable income computed by the business if it is operated as a "C" corporation, and "S" corporation or a partnership?

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C Corporation

C corporations have separate legal existence from its shareholders, so shareholders are not personally liable for obligations of the corporations. So, a C corporation has to pay taxes on its income. The rate of tax for c corporations, are the corporate tax rate fixed by the government. The net income computed to determine the tax liability, is after factoring all costs, deductions and credits available to the corporation as a separate legal entity. The profits of corporations are distributed to shareholders via dividend policy. The shareholders who receive dividends (from after tax income of corporation) should compute and pay tax on such dividends received. So, a shareholder of C corporation is actually taxed twice.

S Corporation

S corporations have separate legal existence from its shareholders, so shareholders are not personally liable for obligations of the corporations. However, contrary to C corporation, S corporations do not have to pay taxes on its operating income (will have to pay taxes on capital gains and passive income). S corporation’s income, deduction and credits are passed down to the shareholders (PS. There is limit for shareholder numbers in S corporation). The shareholders will then compute and pay taxes on such passed through income, based on his tax rates. So, a shareholder of S corporation is only taxed once.

Partnership

Partnership do not have a separate legal existence from its partners, so partners are personally liable for obligations of the partnership. So, the partnership do not have to pay taxes on its income. Partnership’s income, deduction and credits are passed down to the partners (according to their profit-sharing ratio). The partners will then compute and pay taxes on such passed through income, based on his tax rates. So, a partner of partnership is only taxed once.

ekkarill92 answered 2 years ago
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