Thankfully, the IRS has responded to the current world events by extending the filing deadline for both individuals and corporations to July 15th. However, this doesn’t mean that you can skip filing your taxes this year. You’ll still need to file and pay your company’s tax liabilities.
How much you will owe the IRS will depend on your profit and loss for the year and the type of business entity that you have. If you’re like most business owners, you’ll want to minimize your tax liabilities.
Use this guide to help you understand what the S Corp vs. C Corp tax advantages are.
S Corp vs. C Corp Formation
When forming your business, you’ll need to decide C-Corp vs. S-Corp. An S Corp entity is a “pass-through” entity. This means that you report the business’ income and loss on your personal income taxes.
A C-Corp business gets taxed as a corporation and on the owner’s personal income taxes. Whether the owner has income to report will depend on whether or not the corporation made a distribution of dividends to the shareholders of the company. As the owner of the business, they are typically the sole shareholder.
You’ll find that it’s easier to form a C Corp. This is because it’s the default type of corporation, so there’s no additional paperwork to fill out or submit.
S Corp vs. C Corp Tax Advantages
S Corp tax rates tend to be viewed as more favorable. Because they’re treated as pass-through, you have more freedom and flexibility in how you make deductions.
If you have an S Corp, then you can claim a 20% business income deduction on your taxes. You can write off business expenses on your income taxes.
C Corp tax rates tend to be viewed as unfavorable because they’re double taxed. Reading the article, What is double taxation? (and 7 ways to avoid it) can help you evaluate your tax liability.
This type of corporation is best used for venture capitalists looking to have multiple shareholders. Then you can have multiple classes of stock and maintain separate accounting from your personal finances.
There’s no limit on how many shareholders your corporation has. A C Corp is the only type of business entity that can claim charitable deductions. You can also deduct fringe benefits that are provided to employees and shareholders.
As a shareholder of the corporation, you don’t have to pay taxes on the fringe benefits, as long as at least 70% of the rest of the corporation receives those benefits.
Form the Right Business Entity for Your Business
As you can see, how you formed your business will make a significant impact on the S Corp vs. C Corp tax advantages you can claim. If you find that you’ve chosen the wrong entity, then you’re stuck for this year’s tax filing.
However, you can form a new entity and take advantage of better tax terms in the future. Check out the education section of our blog for more helpful advice on running your business.