One of the major decisions while running a small business is to choose the right business entity for your company and your targets. Your business entity establishes the foundation for your company’s structure – which will help you pay your taxes, run your business efficiently, make you aware of the types of documents you need to file, and beyond. So, when it comes to structuring your business for tax efficiency, C Corporations offer several advantages that can lead to significant tax savings. Understanding these benefits will assist you in making informed decisions about whether a C Corporation can smoothen the pathway for you to achieve your business goals. So, here is a list of benefits that C Corporations can offer your small business.
Tax Benefits of C Corporations
Minimising Your Overall Tax Burden
One of the major benefits of a C Corporation is its favourable tax rate. As per the latest tax legislation, C Corporations are taxed at a 21% rate, which can be substantially lower than the individual income tax for higher earners. Usually, the rate of higher earners can go up to 37% at the highest brackets. However, by choosing a C Corporation, you can generate benefits from its lower rate of corporate profits. Thus, it allows businesses to reinvest their profits as new capital, promoting their growth rather than distributing them as dividends.
Carrying Profits and Losses — Forward and Backward
C Corporations have the power to carry forward and carry back certain tax attributes, though the rules are not the same as pass-through entities. Earlier, C Corporations were able to carry back net operating losses to offset past taxable income and receive a refund for taxes paid during the previous years. However, because of the recent changes in tax laws, there is a limit to this option. Now, losses can only be carried forward indefinitely to offset further taxable income. This approach helps smoothen our income and manage tax liabilities over time, even if you cannot reclaim taxes from past years.
Deducting 100% of Medical Premiums and Other Benefits
Another significant perk of C Corporations is the ability to deduct 100% of medical premiums and other benefits like life insurance premiums provided to employees, including you, if you own the company. From premiums for health to long-term care and disability insurance, C Corporations can help you reduce the taxable income of your business, which can further lower your overall tax liability. Also, these benefits are usually tax-free to employees, which makes them an attractive compensation option.
Opening Unique Financing Opportunities
C Corporations sometimes have access to unique financing opportunities that are not usually available to other businesses. For example, they can issue multiple classes of stock and raise capital by auctioning shares to investors. This benefit is particularly important if you plan to scale your business or need venture capital to support your business goals. Thanks to this ability, C Corporations can offer stock options and other equity-based remuneration to attract and hold onto top talent, which is crucial for long-term growth and success.
The Final Takeaway
Operating as a C Corporation can offer several tax advantages, including a lower tax rate on corporate income, deducting medical premiums, and other benefits. By understanding these benefits, you can efficiently manage your tax burden and focus on the long-term success of your company.
