Corporate Income Tax

Contents

TOC o “1-3” h z u Northwest Brands Inc. is a small business incorporated in Minnesota. Its one class of stock is owned by twelve members of a single family. Ordinarily, corporate income is taxed at the corporate and shareholder levels. Is there a way for Northwest Brands to avoid this double-income taxation? Explain your answer. PAGEREF _Toc377392290 h 1

Northwest Brands Inc. is a small business incorporated in Minnesota. Its one class of stock is owned by twelve members of a single family. Ordinarily, corporate income is taxed at the corporate and shareholder levels. Is there a way for Northwest Brands to avoid this double-income taxation? Explain your answer.Corporate income tax is tax imposed on the business entities by a government to help in raising government revenue. When it comes to corporate tax, it is usually charged on the net profit of the firm, while at the shareholders level it is taxed on the dividends of each share holder (Thomas, 1994). This is mostly done in business entities where that are either C-corporations or partnerships.

Given the fact that Northwest Brands Inc. Is a small business, it means that most of the shareholders are also employees in the business. The firm can distribute the earnings of the shareholders in terms of wages instead of dividends. This will avoid the double taxation. Even though the wages will be charged an income tax, it is much lower than the corporate tax charged on the dividends distributed to shareholders (Broomhead, 1998). The other way is for the employees who are shareholders to account for all the earnings that are left so that there will eventually have nothing to be taxed. This is the same as saying that the firm should change to an S-corporation which does not experience double taxation from the government. This is possible because it has a large number of shareholders already.

When the firm employs these tactics it can be able to avoid double corporate tax, this will allow it to expand as it can easily get funds in form of equity from the shareholders rather than as a debt from financial institutions that come with an interest rate charged (Broomhead, 1998). The less the shareholders are charged, the more earnings they will have and will be willing to invest it back into the business.

References

Broomhead, Nick D. (November 1998), Avoiding Double Taxation; An Employment Tax Savings Opportunity, Tax Adviser,

Thomas Deborah W and Keith F Sellers, (November 1994), Eliminate The Double Tax on Dividends, Journal of Accountancy