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Double Taxation Problems

What is double taxation?

Double taxation is where two separate jurisdictions levy taxes on the same declared income, assets or financial transactions. In other words, it could occur with income tax, capital tax or sales tax. Certain countries have tax treaties to mitigate the effects of double taxation. In the U.S., the term double taxation usually refers to a situation where tax is levied on a corporation’s profits as well as on the shareholders’ income when they receive a part of this profit. Listed below are a few questions answered by the Experts on double taxation problems.

If a person was to start their own business and wanted to avoid double taxation and protect their assets, would an S-Corporation or a Limited Liability Company (LLC) be better for the person?

In most cases, both an S-Corporation and an LLC would provide asset protection to the owner as long as they followed the proper procedures and adhered to the guidelines. Double taxation generally happens when the corporation is taxed and then the employees of the corporation are taxed as well through their paychecks. To choose what is best for the business, it would be better to speak with an attorney and a CPA in the state where the business is going to be registered to ensure that all guidelines are met to avoid double taxation.

If a person wanted to start a company, would they want to start it in the State of Massachusetts so that it would be cheaper to avoid double taxation? And how would filing for an LLC versus a corporation affect this?

In most cases, filing for an LLC in the State of Massachusetts would cost around $500 and filing for a corporation would cost around $275. If you are planning to file for a corporation, it may be better to file as an S-Corp so that the business may get pass-through taxation and avoid double taxation. However, filing for an LLC is a less complicated process due to the absence of shareholders. If you have many shareholders, you may need the assistance of an attorney. For more information on this, visit http://www.limitedliabilitycompanycenter.com/llc_vs_s_corp.html

What is the difference between an S-Corp and a C-Corp?

An S-Corp is generally considered a pass-through entity where all the income passes through the shareholders so the company doesn’t pay taxes. Double taxation does not usually occur here because the only taxes that are paid are the personal taxes of the shareholders. A C-Corp, on the other hand, is generally taxed as a separate entity and files a corporate tax return. Here, the shareholders have to pay taxes on their personal income as well as on after-tax profits given to them by the corporation in the form of dividends—leading to double taxation.

What is the difference between an LLC and a corporation?

A corporation and an LLC are both considered limited liability entities as well as flow-through entities. In the case of a corporation, you could choose to be treated as an S-Corp to avoid double taxation. However, an S-Corp is more limited in terms of the kinds of shareholders that they have, so you may consider an LLC because they have more flexibility if you need to add shareholders later on.

In business, there are several rules and regulations that govern double taxation. While you may have come across some of the problems related to double taxation above, there could be others that pertain to your own unique situation. If you need more clarity on this topic, put your questions to an Expert for quick insights and information to deal with your own case.
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Recent Double Taxation Questions

  • i am filing a late/relief for an LLC to be an S corp, do i

    i am filing a late/relief for an LLC to be an S corp, do i file a 2553,wait for an answer then do an 8832 once notified of decision?

    or just the 2553, or 8832?
  • Our US company plans to employ (on payroll) 2 foreigners from

    Our US company plans to employ (on payroll) 2 foreigners from Europe who will work for us in Mexico. They want to pay their income tax in US (which would be less then in their home country) and be able to document that they paid their taxes in US to avoid double taxation. Is this possible and how can it be done?
    Thanks Heinz
  • Hello. My question involves converting a C Corp to an S Corp

    Hello. My question involves converting a C Corp to an S Corp where there will be transfer of ownership after the conversion to S Corp. I guess there may be numerous questions in this one item but I will list all and see how you want to move forward. Thanks in advance for all of your help.

    1. Right now there is one shareholder in the C Corp, a father, who is going to transfer 100% of his ownership to his son after the conversion to an S Corp. So, the questions are:

    a) there will be substantial E&P after the conversion. Should the father take all of this amount as a dividend and reduce to zero while he is still 100% owner at the C Corp level. Basically reducing retained earnings to zero at time of conversion. If there is enough cash of course to do this. If there is not enough cash at the time of conversion I feel the father, while now still 100% owner of the converted C Corp to S Corp keep his ownership until he distributes the E&P as a dividend at the S Corp level. Of course, making the election under Treas Reg 1.1368-1(f) to distribute E&P first. Is this the best scenario? Also, I'm not worried about the "sting" tax because their passive income is not in excess of 25% of gross receipts.

    b) once the conversion is made to the S Corp and there are transfers of ownership to the son, not yet 100% transferred, does the distribution of E&P have to be equal the same as AAA distributions have to be equal under the S Corp rules?

    c) if there is basically just a transfer of shares to his son then there is no tax effect to either party after the transfer unless there is money paid for the son's interest of the shares transferred?

    I think this is all for now so as I said before your help is much appreciated in advance. Also, there are no items for built in gains for the C Corp so I think that is the only worry besides the items above of why not to convert to an S Corp. If you see any other items of concern, please advise.

    Thanks!!
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