Question

1. How is corporate income double taxed?

2. What is the major advantage of an S Corporation?

Answer 1

1. The corporation is taxed on its earnings(profits), and the shareholders have taxed again on the dividend they receive from those earnings. The Earnings of the Company is taxed at Corporate Tax Rate of Federal Govt. and the Dividend which is received by the Shareholders would be taxed at shareholder's personal tax rate, This is How the Incomes of Corporation are taxed Doubled.

2. Major Advantage of S Corporations are as follows:

i) Pass-Through Taxation: An S Corporation is pass-through entity for federal income tax purpose. Business income,as well as many tax deductions, credits, and losses, are passed through to the owner rather than being taxed at the corporate level. This Avoid any Double Taxation.

ii) Salary and Dividend Payments: An S Corporation owner can opt to receive both a salary and dividend payments from the corporation. This can result in an overall lower tax liability

iii) Ease of Conversion: There is Ease of Conversion when an S corporation is planning to be a C Corporation i.e. to have the corporate identity. It can be done easily by making a filing with IRS.

iv) Assets Protection: S Corporation Provides Owner with a limited liability, that is its assets are shielded from the claim of business creditors.