How can I avoid the “corporate double tax” and what exactly is it?
A “corporate double tax” happens when a business corporation (or an entity that is treated as a business corporation for tax purposes) pays a federal tax on its income, and then its owners pay another tax as they collect corporate profits.
The “entity level tax” is the tax on the corporation and so an entity taxed in this way is called a “C corporation” or C corp.
Here are ways to avoid the double tax:
- Become an S corporation, which doesn’t change the nature of the business under state business law but rather eliminates federal tax at the corporate level.
- The second tax, which is on the owners, can be deferred by suspending profit distributions to corporate owners.