Now that you own a company, someone has to pay the taxes.  But did you know that sometimes your business entity pay the tax and sometimes the owners pay the taxes personally?  It all depends on the types of companies you own.

Just Passing Through

If you invest in an s corporation or a partnership of any type, you have probably seen a year end Internal Revenue Service (IRS) K-1 tax document.  It is sometimes equated to a W-2 for introduction purposes.  Although s corporations and partnerships file federal tax returns, these business entities do not pay federal income taxes.  Since these business returns are for informational purposes only, a K-1 will be given to each owner of the company.  The K-1 will include their share of company income so they may report it on their personal federal tax return, or Form 1040.  The rate paid will be determined by each owner’s individual tax bracket.

Twice the Taxing Fun

Regular c corporations do pay federal tax via their annually filed federal business income tax return.  However, if a net business loss occurs, no tax will be due that year.  In other words, business expenses were more than the income for that year.  As you recall, c corporation business owners have shares of stock to represent their ownership.

To review, the c corporation paid tax on its income.  ABC company had a great year and decides to declare a dividend with that income.  But the owners will receive a 1099DIV to record that dividend income on their personal federal tax return.  So it is taxed again.  You may have heard a reference to double taxation.  This is it.  And the company does not even get to deduct the dividend payments to the owners.  The owners’ transactions are considered balance sheet equity items.  So taxes are not always as simple as they appear.