Please help us improve our site! No thank you. Revenue Act of Revenue Act of The following state regulations pages link to this page. The method used to make a corporate distribution will determine the tax consequences of the withdrawal. Of course, a corporation can distribute money in a number of other ways, as well, including payment of wages, fringe benefits, loans, and payment of rent. The corporation itself does not recognize gain on a distribution of cash to its shareholders.
Rather, the shareholders are the ones who must be concerned with taxation. The corporation pays tax on the taxable income, and the shareholders pay tax on dividends received. The distribution is then taxed the same as a regular dividend. Wages paid to a shareholder for services rendered in an employee capacity are deductible by the corporation and taxable to the shareholder. Unlike income in the form of dividend distributions, wages are not double taxed.
This creates an incentive for a shareholder in a C corporation to take as high a wage as possible to minimize overall taxes on corporate earnings. Wages paid to the shareholder must be based on services rendered and will be scrutinized by the IRS. Funds can also be distributed by the corporation in the form of fringe benefits. Fringe benefits, such as health insurance, medical reimbursement plans, company cars, education, and group term life insurance, are tax-deductible corporate business expenses by the corporation.
A corporation can lend money to a shareholder. However, the IRS will reclassify the loan as a dividend distribution if the loan is not well documented. The loan must be a bona fide one, with a written promissory note signed and dated by both the lender the corporation and the borrower the shareholder. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page.
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