Tax issues: S Corporation vs C Corporation including advantages or disadvantages, distributions, tax exempt income, character of tax on dividends and distributions

1 Is there any advantage to having a C Corporation instead of an S Corporation? The S Corp. appears to have the tax advantage on its side.

2 Why aren't life insurance proceeds taxable? Second, if tax-exempt income is not reportable on a tax return, can a taxpayer claim deductions against that income on the return?

3 Normally, S corporations, and somewhat so in C corporations, avoid making distributions to shareholders that could be taxed as capital gains. (Taxation has become a word to avoid at all costs!) Should corporations that may be doing well in the cash department consider paying out dividends in 2009?

4 If the situation in a particular year is that a business had a net profit, and the shareholders decided to distribute all of that income right down to 0, would any of the distribution be taxable to the shareholder?

5 Why would depreciation be recorded on the books but not on the tax return?

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Solution Preview proceeds aren't taxable is that they provide a method for sudden and unexpected events to be mitigated by not assessing tax. Life insurance is often part of buy-sell agreements and would therefore assist in making a transition on the death of an owner. Similarly, medical reimbursements in lawsuits are not taxable under the theory that they represent payments to make a person whole by compensating them for a medical loss or disability. The same theory could apply to life insurance proceeds in that such payments could make a person or a company whole again. Secondly, it is simply the law.

Expenses of tax-exempt income are not deductible because the income was not reportable. Expenses are designed to offset income. No taxable income: no deductions.

3. Yes, 2009 might be a good year to pay out dividends from a C corporation because of reduced rates; however, the double-taxation feature should be discussed. Dividends from C corps are not deductible at the corporate level and therefore, they are double taxed: once at the corporate level and again at the individual level. Because of the ...