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Double taxation avoidance, benefits to small business

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From the Internal Revenue Service website (www.irs.gov). Click on the "Business" tab, then the "Corporations" link. Find the link to "S Corporations" and read the information provided by the IRS.

Answer the following question:

Explain the reasoning behind the need for the S Corporation provisions in the IRS Tax Code and how the S Corporation benefits small business and the individual in contemporary culture.

Critical Elements:

1. Explain double taxation avoidance.

2. Illustrate how small businesses and individuals benefit.

3. Explain how the benefits affect contemporary culture.

4. Analyze the events that resulted in the business income tax code.

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Solution Summary

Double taxation avoidance and the benefits to small businesses are examined.

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The reasoning behind the need for the S Corporation provisions in the IRS Tax Code and how the S Corporation benefits small business and the individual in contemporary culture.

Critical Elements:

1. Explain double taxation avoidance.

2. Illustrate how small businesses and individuals benefit.

3. Explain how the benefits affect contemporary culture.

4. Analyze the events that resulted in the business income tax code.

Tax planning opportunity available with S corporations that is not available with limited liability companies taxed as partnerships (LLCs). With an S corporation you may be able to save employment taxes that you would otherwise have to pay if you were operating your business through an LLC.

How? By paying yourself a reasonable salary and taking distributions beyond your reasonable salary in the form of dividends. This works if your salary is reasonable. Your tax savings depend on the amount of your salary and the amount of your dividends. If your salary exceeds the FICA wage base, the total tax savings is 2.9%--the total of the employer and employee side Hospital Insurance (HI) (aka Medicare) taxes beyond the FICA wage base.

These tax savings can be significant. To use an example:

In 2010, a taxpayer reported a salary of $360,000 from his consulting business and profits paid in the form of dividends in excess of the salary amount of $5 million. Tax savings: 2.9% of $5,000,000 is $145,000.
Of course, if you ...

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