In short
A C corporation's income is taxed twice: at the corporate rate of 21% when earned, and again to shareholders when distributed as dividends. Pass-through entities, such as partnerships and S corporations, are taxed only once, at the owner level.
Key takeaways
- Reasonable salaries, interest on shareholder loans and rent paid to shareholders are deductible, reducing the corporate-level tax.
- Retaining earnings delays the second tax but can trigger the accumulated earnings tax.
- Qualified dividends are taxed at up to 20%, plus the 3.8% net investment income tax.
Where it's tested
TCP: Entity Choice & Structuring — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A C corporation with substantially appreciated assets wants to convert to an LLC taxed as a partnership. What is the primary tax consequence?