TaxGuru,

I am a bookkeeper and am working on a small C corporation whose year end financials show profit. This profit is going to result in double taxation.

How can my client avoid double taxation in the current year and any suggestions for the future?

Any help would be greatly appreciated.

Dear bookkeeping,

An anticipated profit in a C corporation can be avoided by simply advising the client to take a bonus check, paying of vendors before year end, adn using the normal strategy of accelerating expenses and decelerating income.

Just ask your client to increase his salary, and also consider a SEP plan as well. Clearly, the business is doing well, and an increase in salary is a reasonable proposition to the client.

But, if my client increases his salary he will end up paying payroll taxes at 15.3% (his share and the corporation share) and additional federal and state taxes would also be withheld on his salary. This seems costly alternative...Am I missing something here??

Bookkeeping,

The alternative is to leave the profits to be taxed at the C Corporation level, and leave the residual profits within the C Corporation.

Eventually, the IRS rules on Accumulated Earnings will force you make a dividend distribution which result in double taxation of the earnings on the individual side, as these earnings were already taxed once at the C Corporation.

Taking a bonus salary or additional salary is usually the best option after considering the acceleration of expenses and deceleration of income.

I converted my C Corporation to an S corporation to avoid double taxation!

Dwhite,

This is only possible if the owners of the C corporations meet the S Corporation conversion tests!