Tax corporate - Essay Example

Double Taxation Introduction Double taxation occurs when corporate firms’ profits are taxed at both corporate and personal level (Ted and Robert, 1999). Normally, corporation ha to pay income tax at a standard corporate rate before profits are paid to investors. There after the distrusted profit share in form of dividends are subjected to income tax at a standardized personal rate. In this thesis the issue of double tax avoidance is discussed identifying several methods that can be applied in successfully avoiding double taxation.

There are several ways that corporations can apply in avoiding double taxation. For many small businesses such as Northwest Brand Inc. often all major business investors are employees of the firm (Thomas and Keith, 1994). The business can avoid double tax through distributing their earnings to the corporation’s staff in form of wages and fringe benefits. Although the individual workers have to pay income tax, the Northwest Brand Inc Corporation is able to deduct employee’s wages and other benefits paid to its workforce in form of business expenses hence firm can comfortably avoid paying tax on the expense amount.

Similarly, small businesses distributions to employees who are owners of the business accounts for all of the company’s income, ultimately nothing are left that can be subjected to corporate tax. In a situation where the company’s income is left in the business, this will normally be retained in order to finance future business expansion. Thorough this amount will be subjected to corporate tax. The charged rate is often lower compared to those paid by individuals. Larger corporations are unlike small businesses, are more likely to have investors that are not employed by the business.

Under this circumstance, the firm can not distribute corporate profits to them as part of their remunerations among other business related incentives, which are able to avoid double taxation as it can be done under businesses that owners are among the workforce. However, they are able to avoid double taxation just like the small businesses (Ted and Robert, 1999). A typical case can be a non-active shareholder is referred to as the business consultant. Since payment to business consultants are tax-deductible expenses rather business expenses rather than dividends.

It is may be difficult to include business owners to the corporation’s payment arrangement, for instance through including investors as part of the business directors. In order to obtain relief business investors from double tax, use tax-relief saving methods such as pension schemes arrangements and business donations are often viewed to be a considerable measure by investors in large corporations. This tax-exempt status of these groups makes it possible for them to avoid paying tax on their corporate dividends they receive (Thomas and Keith, 1994).

Conclusion Critics of double taxation often would prefer integrating corporate and personal tax systems. On the contrary, I am of the opinion that this kind of taxes can never affect business investments decisions. Double taxation only places corporations at a disadvantage when compared to unincorporated business. This may influence corporations to use their debt financing rather equity financing, considering the interest payments is deductable while dividend are not deductable. This provides increased incentives for the company to reserve business paycheck other than allocating to investors.

References:Ted, N and Robert, F. (1999). How to form your own "S" corporation and avoid double taxation. Michigan: the University of Michigan.Thomas, D. W and Keith, F.S (1994). Removing Double Tax on Dividends. Journal of Accountancy .