If you own a small business, and had his work has begun in the last 20 years, you're probably an "S Corporation (Subchapter S of the IRS Code), or" LLC (Limited Liability Company). These types of organizations are very popular because they "are going," companies, which simply means that the company's profits realized by owners are given for tax purposes.
However, there are many small companies as a C-branchCorporations. "If your business seems to be one of them, you should read this section, that is the case, avoiding taxes, use of language as" constructive dividends. "
Note: If you do not know what companies look like the name of your accountant, or simply a tax return last year. If your company has filed Form 1120 (not 1120-S), a "C", and apply the information presented below for your company.
Entities known as "C-Corpssometimes called traditional societies, as they have since a long time and have for several years, were the only way to legally protect your personal assets when a person has made to the company. These types of companies that pay is not only a declaration of income tax, taxes on those earning you a different type S and LLC, which pay no taxes because the income is transferred to the owner is liable for the payment of all taxes on profits.
BusinessThe owners, the money from one entity type C gain in more than a reasonable compensation must pay taxes on these distributions, dividends, which is by definition of taxable income should be paid. Since dividends are not deducted after-tax income, they are to arrive at a taxable income that they are double taxation, where the shareholder receives and pays taxes means to them.
No one may tend to avoid double taxation for owners of C corporations to dividends. However, thereIf the IRS can declare dividends in certain transactions, and taxation, even if the dividend has been declared Corporation. They are known as "constructive dividends" and has been a very frequent customization. Some things to be aware of:
Below-market loans
Tell me, as the sole shareholder of Corporation C to borrow money from your company. Repayment with interest is not a dividend, is not it? When interestRate is significantly below the market rate, the amount of interest paid and the amount of interest that would be paid below the market rate, can be considered a dividend.
The cancellation of the debts of the shareholders
The latter, if fairly obvious. Your company decides that it is made no longer bound to get a loan for you. We have in fact a dividend.
The transfer of ownership to less than FMV
A shareholder's buying a car and payas agreed. It is the selling price to the market value? If so, can be interpreted as a dividend.
Wages unreasonable
There are many rules and with the legal procedures concerning what is considered an appropriate reward for an entrepreneur. The above amounts are reasonable can be interpreted as a dividend, which means that the company is not able to deduct these amounts.
Unreasonable rent and lease income
It is not uncommon for small companies to lease or rent real estatetheir activities. The problem occurs when you rent or rent too high.
Open Ended Loans
Loans from shareholders are common, but are treated as loans and can not be opened. If you are not able to execute a loan document (signed and authenticated), and if you do not repay, then it is clearly possible, legitimate, not as a loan by a consultant, but taxable dividends.
Corporate CreditMaps
Auto expenses, entertainment .. These are expenses that, if the employees can be considered constructive dividends.
In general, if you have a C-company, and your company has some economic advantages that the progress of your interest and are against the interests of your company, without reimbursement to the value of that benefit considered a constructive dividend. You could be in danger, and it is worth consulting with your tax adviser andLawyer.
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