All corporations are not classified as equal. When it comes to filing taxes, knowing what you can classify your business as is an important first step. A C corporation is a corporation that is taxed separately from its owners. This generally includes all for-profit corporations. An S corporation, however, does not pay income tax, but its shareholders do. These distinctions are only for filing taxes. If a small business meets certain requirements, which most of them do, they can file as a C corporation.
Here are some “Do’s and Don’ts for running your C corporation:
- Retain all tax records. This is good practice for anyone, but especially for C corporations. If they relate to business property, keep them three years past when you think you should.
- Move profits and losses. C corporations can define their own fiscal year, which means they can move profits and losses backwards and forwards as need be to maximize their tax return.
- Deduct medical premiums. As long as health insurance is available to all employees (not just shareholders,) there are significant write-offs you can get for medical premiums.
- Carry losses over multiple years. It is likely in your first year of running a C corporation you will have significant financial losses, but it is possible to carry them across multiple years.
- Write off charity contributions. C corporations are the only type of corporation that can write off charitable contributions on their taxes. Trips to Goodwill count!
- Overlook carryovers. Oftentimes, credits and deductions have rules that stop you from using them fully in the current year, but allow you to carry them over to the next year.
- Maximize your tax burden. The 2018 tax reform means that C corporations can be taxed at a much lower rate, especially for businesses that only pay salaries, not dividends.
- Receive dividends. For C corporations, they get taxed twice. Instead, pay employees enough that there are no taxable profits at the end of the chosen fiscal year.
- Discourage passive investors. Unlike S corporations, C corporations attract and reward passive investors.
When you’re just starting a small business, you have a lot on your plate. Becoming a C corporation and learning how to best handle your taxes is a must for all business owners! For more information about C corporations and running your business, contact Trembly Law today! You need an experienced business law firm on your team.