Everything You May Need to Know About Double Taxation
Double taxation, if you have never heard of it before, is enough to make you shiver. ‘You can be taxed twice?’ you’re probably asking yourself; the short answer is yes if you are a corporation, you can. The long answer, well, that’s a bit more complicated. The long answer is what this page will hope to tell you precisely, as contained within this article, you will find everything that you may need to know about double taxation.
Double taxation will likely never affect you unless, of course, you are at the helm of a corporation. If you are the head of a corporation and do not know what double taxation is, you must keep on reading, as you will likely cross paths with it at least once. Here is everything that you may need to know about double taxation contained within a comprehensive and straightforward guide.
What is Double Taxation?
Put simply, double taxation is when you are required to pay income tax twice on the same income source. For businesses, double taxation is when a corporation is taxed on a personal and a business level. There are two types of businesses that are double-taxed, these are corporations (c-corps), and LLCs that have elected to be treated the same as a corporation. Other business types, like S-corporations and normal LLCs, can avoid having to pay double tax, owing to pass-through taxation.
Pass-through taxation is when your income is only taxed once; pass-through taxation occurs when the taxes pass through the business and onto the owners. Businesses that are likely to have pass-through taxation are partnerships; limited liability companies; s-corporations, and sole proprietorships. It would be worth contacting a financial advisor to determine whether or not you would be eligible for pass-through taxation or if you would be resigned to double tax.
How it Works
Double taxation works by taxing a corporation as a separate entity and then taxing the shareholder’s personal income also. The reason that this happens is that corporations are separate legal entities, as are the shareholders, which is not the case in s-corporations and sole proprietorships. Corporations have to pay tax annually, and when a corporation pays dividends to its shareholders, the dividends equally have tax liabilities. Shareholders who are in receipt of any dividends must pay their taxes on them, thus, double taxation. A corporation cannot pay business income (retained earnings) tax until it has been paid in dividends to its shareholders.
Feeling Confused?
If, at this point, you are considerably confused, which many people likely are, it would be best for you to contact a financial advisor or attorney who can help you out with the process. If you have decided to Get tax debt help with Silver Tax Group, a service based out of West Palm Beach, Florida, then you will already know that a professional tax accountant will ease your worries and lead you through the accounting procedure. Tax concerns are enough to give people considerable anxiety, being that there are massive penalties for tax avoidance.
Is it Avoidable?
Is double-taxation avoidable is a question that is often asked. Yes, it is. If you want to avoid paying double taxes, there are a couple of things that you can do that will ensure you avoid double-taxation. These include not licensing and structuring your business as a corporation, adding your shareholders to be paid as a board of directors, having employees as shareholders.
Business Structure
By structuring your business as a sole proprietorship, an LLC, a partnership, or an s-corporation, you can altogether avoid having to pay double taxation and will just be taxed once. You can also follow other business structures that will allow you to have pass-through taxation and avoid double taxation. If you ensure that you, the company’s owners, and other shareholding employees pay tax on their earnings, you can avoid double taxation.
Dividend Distribution
Another effective method of avoiding double taxation is not distributing dividends to your shareholders and considering another payment method, for example, employee compensation; you can also put income back into the company rather than putting it out as dividends. You should always contact an attorney or accountant when attempting to avoid double taxation so you can ensure that you do not fall in breach of tax laws.
Now, with the help of this page, you should know exactly what double taxation is, how it can be handled, and how it can be avoided. Double taxation for many corporations is a massive problem, so rather than accepting it, try as hard as you can to prevent it. Otherwise, you may lose out on a lost of money.
