Double-taxed income is a term that often irritates many. After all, how is it fair to pay taxes twice on the same income, right? But, before you judge too quickly, take the time to see it from a legal point of view. A corporation is viewed as a separate entity from its owner and shareholders, meaning the business’s debts are separate from the shareholders’ personal debts. The business taxes are also considered separate from the shareholders’ taxes, which means that you’ll be required to pay a tax on the business’s total earnings and a separate tax on your personal share of the earnings. While knowing this doesn’t change how double-taxation is viewed, understanding the ins and outs of tax law can teach you three critical pieces of information listed below.
Not All Businesses are Double-Taxed
The taxation law only applies to corporations and limited liability companies (LLC) that choose to be treated as a corporation for tax reasons. If you are the only investor, in a partnership, a proper LLC, or an S corporation, you don’t have to pay two separate taxes. If you’ve noticed, despite being corporations, S corporations are treated differently from C corporations when it comes to taxation and the other legal aspects. It is also important that you keep in mind that the businesses that don’t get double-taxed suffer from other disadvantages depending on the type of business.
There Are Ways to Avoid Double-Taxation
One of the benefits of understanding a particular law is learning how to find your way around it without actually breaking it. There are many ways to avoid paying a doubled income tax. For example, a small change in the business structure can classify you as an S corp instead of a C corp. As a result, you’ll become a pass-through entity, and according to the IRS tax code, the business’s income is considered personal income and is, therefore, taxed as such. That method, while slightly disadvantageous, is a low-risk move. If you know the tax law, including things like the benefits of pass-through elective tax, you’ll have the power to develop the most suitable way of avoiding the double tax.
The Ways to Avoid Legal Errors
Businesses without the proper knowledge of the tax code are prone to legal errors that usually end up being quite costly. Retaining earnings is a normal activity for many businesses who wish to reinvest or reduce their liabilities. Did you know that if you retain too much money, it raises a red flag for the tax authorities, and you could risk a penalty? If you knew enough about double-taxation, you’d know that the income is only taxed when distributed. The authorities could view your retention as a way to avoid paying the tax; This knowledge can help you prepare for such cases.
The key to success is understanding. If you understand the business world deep enough, what’s to stop you from working its every angle to your benefit? But why do you have to understand double-taxed income? Well, because then you’ll know how to work your way through and around it. You’ll understand how your business structure affects your tax payments, and you’ll also know what small adjustments to make to comply with the laws. Last but not least, you’ll have a better understanding of the taxes you’re paying and why you’re paying them.
