Question

Income earned by C corporations is taxed​ twice, once when the income is earned and again when it is distributed. If​ so, how is it possible that operating a business as a C corporation can reduce taxes.

A. The C corporation should deduct all distributions as salary expenses to reduce taxable​ income, therefore reducing the taxes.

B. It is not possible to reduce taxes in a C​ corporation, double taxation is a disadvantage of this type of corporation.

C. Up to​ $100,000 of income earned by a C corporation is taxed at​ 15%, whereas a sole​ proprietorship's income is taxed at the​ owner's marginal tax​ rate, which will be higher than​ 15%.

D.The 21​% tax rate applies for C corporations. If an individual with a significant amount of other income operates a new business as a sole​ proprietorship, that income is taxed at the​ owner's marginal tax​ rate, which may be higher than

2121​%.

​Thus, the current tax can be reduced if the corporate form is used and income is retained in the corporation. This advantage will be reduced​ (and possibly​ reversed) if the corporation distributes the income.

Answer 1

Income earned by C corporations is taxed​ twice, once when the income is earned and again when it is distributed.
Option (B) is correct. It is not possible to reduce taxes in a C​ corporation, double taxation is a disadvantage of this type of corporation.

Option (A) is incorrect. The C corporation should deduct all distributions as salary expenses to reduce taxable​ income, it can only be done in small business and IRS expects a shareholder's compensation to be in line with their responsibilities towards the corporation.

Option (C) is incorrect. Up to​ $50,000 of taxable income  earned by a C corporation is taxed at​ 15%.

Option (D) is incorrect. If an individual with a significant amount of other income operates a new business as a sole​ proprietorship, that income is taxed at the​ owner's marginal tax​ rate, which may be lower than 21%.