There are several ways to avoid a corporation tax. Most often for an owner of a small company avoiding a corporation tax will involve setting up the right corporate structure. There are types of corporations that are not taxable entities, and use of these structures will result in no corporate tax as long as all applicable IRS regulations are followed.
Here's how to set up these non-taxable corporate structures:
- First there is the S Corporation. This works well for small, closely held companies. The profits of the S Corporation flow through to the individual owners personal tax returns. The profits are apportioned to the owners based on percentage of ownership. By using an S corporation, the owners avoid double taxation. Double taxation occurs when the corporation pays income tax on corporate income, and then the owners pay income tax again when the profits are distributed as dividends.
- The second type of non-taxable corporate entity is the Limited Liability Corporation. This type of corporation works similarly to the S Corporation, but there are some differences as far as IRS regulations are concerned. These differences have to do with the number of stock holders/members. The S corporation is more limited than the LLC.
Both of these types of corporation are used to provide corporate shield protection from legal liability regarding lawsuits and to avoid corporation tax. The advantages and disadvantages of either of these types of corporations really do not have much to do with taxes.
For C Corporations (traditionally the most common type of company) avoiding corporate tax is a matter of tax planning. The C Corporation can take advantage of tax credits and write offs that may not be available to other types of entities. Expenses can offset revenues so that there are no profits or very small profits. A C corporation can reinvest its revenues in the business, creating depreciable assets that create tax write-offs. There are many ways for a C corporation to carry out tax planning that helps avoid corporate tax. Tax planning strategies can be simple or extremely complex. Many large corporations pay no taxes year after year because of their complex tax strategies.
For a small C Corporation a common strategy is for the owners to work as officers in the company and get paid a salary rather than dividends. Of course they must really work for the company, and there are limits to their compensation. If the IRS determines that they are over-compensated there will be tax consequences for the corporation.
Avoiding 100% of corporate tax is not always possible, but minimizing the amount of corporation tax using legal strategies is always possible. The tax code is extremely complex, and it is always best to have tax professionals advising on tax strategies.