Tax attributes of liquidating corporations
Keeping track of the constantly changing tax code is a daunting task.New Tax Law, Revenue Rulings, Filing Requirements, Phase-Outs, Dependency Rules; it's a lot to remember! has achieved the highest published satisfaction rating in the industry.the current uncertain economic environment, depressed asset values (especially in certain real estate markets), and historically low income tax rates on distributions to individuals (qualified dividends) from C corporations (which are scheduled to expire at the end of 2012) may present an opportunity to exit C status and its attendant double taxation at an acceptable current tax cost.Tax advisers should be talking to their C corporation clients about the opportunities that now exist to avoid substantial future taxes.Such an approach may reduce the taxable income of the C corporation to an acceptable level and result in the earnings being taxed only once at the shareholder-employee level. Moreover, while in some businesses high amounts of compensation as a percentage of corporate income may be reasonable (e.g., where personal services are the principal contributor to income, such as in a dental practice), in other businesses where capital is a principal contributor to income (e.g., rental real estate or manufacturing and sales with large capital investment), compensation that is a high percentage of pre-tax corporate income may be more difficult to justify.Managing the level of corporate taxable income by paying compensation to shareholder-employees may be a difficult strategy to implement where there is more than one shareholder and the individual shareholder-employees do not believe that compensation payments that are proportionate to stockholdings accurately reflect their respective contributions to the success of the enterprise.This difference is even greater when taking into account state taxation.
If a corporation has elected to be an S corporation or a business is not operated in corporate form (e.g., partnership, limited partnership, or limited liability company (LLC)), there is only one level of taxation at the owner level, and a savings of 9.75% of taxable income, assuming the owners are individuals taxed at the highest individual rate.
State and local taxes and rules vary by jurisdiction, though many are based on federal concepts and definitions.
Taxable income may differ from book income both as to timing of income and tax deductions and as to what is taxable.
C corporations are taxed on their taxable income at federal rates up to 35%.
Distributions of qualified dividends to individual shareholders are taxed again at a federal rate of 15%, and those dividends are not deductible by the corporation.
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Corporations are also subject to a federal Alternative Minimum Tax and alternative state taxes.