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Jean   Murray

What is "Double Taxation" for Businesses?

By May 9, 2008

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The Dividend Tax has been a hot topic in the presidential contest, and someone recently asked me about the term "double taxation" as it relates to business taxes. Here is how double taxation affects corporations:
  • Corporations pay corporate income tax on the profits of the corporation.
  • Dividends paid by the corporation to shareholders are taxed to these individuals. Thus, double taxation.

There is also double taxation on business owners who are also employees of a corporation, because they must pay taxes on their income as employees, as well as being taxed on dividends they receive. Of course, most small businesses don't pay dividends. But, the business owner is still responsible for finding the money to pay the business income taxes as well as his/her own taxes on the salary taken home, and the payroll taxes on the income.

Billionaire Warren Buffett opposes lower taxes on dividends. Easy for him to say; his firm, Berkshire Hathaway, doesn't pay dividends.

And if you are thinking you could just cut your salary and avoid taxes, think again. The IRS requires the corporation to pay a "reasonable" salary to officers. Instead, don't pay dividends on the profits of the business.

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