The Tax Implications of C Corporations

Using the “dividends received” exclusion. C corporations can reap stock dividends from other unrelated corporations at a 30 percent tax rate. Therefore, it can be a smart move for your C corporation to invest in this manner, especially if you don’t need to take large dividends out of the company for a while.

Banking on losses. C corporations can take virtually unlimited capital and operating losses, which means the IRS will not scrutinize you if you report losses many years in a row. (The IRS is not so lenient with partnerships, sole proprietorships, and limited liability companies that declare similar losses.) You can also carry losses backward or forward and apply them against other tax years, allowing you to substantially reduce your tax bills.

Less auditing. A corporation that reports less than $100,000 of gross receipts per year is only one-third as likely to face an IRS audit as an unincorporated business with similar income. Keep in mind, however, that there is no foolproof way to avoid an audit; don't use this as an excuse to play fast and loose with tax rules.

C corporations also enjoy certain tax advantages associated with fringe benefits:

• Health insurance premiums for employees are 100 percent deductible. Sole proprietors and partnerships can only deduct 60 percent of their health insurance and long-term care insurance premiums.
• Your corporation can also implement a medical reimbursement plan that allows you to deduct medical expenses that insurance won't cover. Sole proprietors and partners cannot deduct medical expenses in this manner.

Of course, always consult your attorney and accountant to determine if you should employ specific C corporation tax strategies.