In this video, we discuss taxation of business income for various entities.
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The way taxes apply to a C corporation's net income is significantly different from how they apply to flow-through entities like partnerships, S corporations, Schedule C sole proprietorships, and most LLCs. For C corporations, there's a concept called double taxation. This means the income earned by the corporation is taxed twice. Initially, the corporation itself pays taxes on its income. Later, when this income is passed on to shareholders as dividends, it gets taxed again at the individual shareholder level. On the other hand, income from flow-through entities is taxed just once. This single taxation occurs directly at the owner level. Regardless of whether the owners actually receive the earnings or not, the income is taxed when it is made. This fundamental difference highlights the distinct tax treatment between C corporations and flow-through entities, emphasizing the dual tax burden faced by C corporations and the single tax point for flow-through entities at the owner's end.

Entity-Level Income Tax
The income of a C corporation is taxed directly at the corporate level, which is not the case for other types of business entities. The rate at which this income is taxed is a flat 21 percent. This means that before any profits are distributed to shareholders, the corporation itself must pay taxes on its income at this rate.

Owner-Level Income Tax on Dividends
After the C corporation has paid taxes on its income, any distribution of this income to shareholders in the form of dividends is taxed again, but this time at the owner or shareholder level. The rate at which dividends are taxed depends on the shareholder's income bracket:

0 percent for shareholders with lower income,
15 percent for the majority of shareholders,
20 percent for shareholders with higher income.
This tiered tax rate system means that the more a shareholder earns, the higher the tax rate on dividends they receive from the corporation.

Net Investment Income Tax on Dividends
On top of the tax rates applied to dividends, individual shareholders who earn above a certain income threshold may also face an additional 3.8 percent net investment income tax (NII) on their dividend income. This additional tax is aimed at higher-income taxpayers, kicking in for those with an adjusted gross income (AGI) over $200,000 for single filers or $250,000 for married couples filing jointly.

Earnings Retention
C corporations have the option to retain their earnings instead of distributing them as dividends. If they choose to do so, the taxation of these earnings is deferred until they are eventually distributed to shareholders. This means that if a corporation decides to keep its earnings within the business for reinvestment or other purposes, shareholders won't have to pay taxes on these earnings until they are received as dividends at a later date.

In summary, C corporations face a unique tax structure where their income is taxed at both the corporate level and again at the shareholder level when distributed as dividends. The rate of taxation at the shareholder level varies based on income, and higher-income shareholders may be subject to an additional tax on their dividend income. However, if a C corporation retains its earnings, the taxation of these earnings is postponed until they are distributed.




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