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    Tax issues: S Corporation vs C Corporation

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    1 Is there any advantage to having a C Corporation instead of an S Corporation? The S Corp. appears to have the tax advantage on its side.

    2 Why aren't life insurance proceeds taxable? Second, if tax-exempt income is not reportable on a tax return, can a taxpayer claim deductions against that income on the return?

    3 Normally, S corporations, and somewhat so in C corporations, avoid making distributions to shareholders that could be taxed as capital gains. (Taxation has become a word to avoid at all costs!) Should corporations that may be doing well in the cash department consider paying out dividends in 2009?

    4 If the situation in a particular year is that a business had a net profit, and the shareholders decided to distribute all of that income right down to 0, would any of the distribution be taxable to the shareholder?

    5 Why would depreciation be recorded on the books but not on the tax return?

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    Solution Preview

    1. The S Corporation has a number of advantages which supports the fact that there are many more "S"s currently than there are "C"s. One stroke of a pen could change that preference, and it is being discussed in Congress: If they made all S Corporation profits subject to self employment tax, there would be taxpayers switching to C Corporation status in a hurry.

    But to answer your question about C corporation advantages:
    a. The tax rates are often lower on C corporation profits retained in the entity.
    b. Certain limitations on the deductibility of shareholder benefits are not as limited as in the S corporation.
    c. Dividends from a C corporation can qualify for reduced rates on the individual return.
    d. They are less apt to selected for audit.
    e. There is flexibility with regard to how much income will be reported on the individual return in terms of varying the salary amount for closely held corporation officers.
    f. There are still choices about fiscal year ends generally not available to the S corporation. Fiscal year ends can be used to shift income between years.

    2. I suspect the reason life ...

    Solution Summary

    The 746 word solution provides a detailed paragraph in explanation to each of the questions.