Inc. & Dividends ?

[remozseo]

Hi there !

I do need clarification about one simple fact.

Example:
US based Inc. generates 100k annual profit
Corporate Tax on FED+State based on the 100k annual profit: ~30k

The Inc. decides to pay Dividends.
Can the company only pay out Dividends AFTER the taxes have been deducted from the profit ?
In that case, it would mean, the Inc. can only pay a maximum from 70k on Dividends since 30k are gone on FED+State taxes ?

OR... does it mean...

The Inc. could pay 100k on Dividends. The Inc. would NOT HAVE ANY PROFIT.
Therefore, the Inc. would NOT pay any FED and State taxes ?

And only the Shareholder who receives the 100k Dividends will be taxed ?


Thank you very much for any little help,
appreciate it !

[Freelancier]

Dividends are not a deduction against profits. It's a return of equity to the stakeholders. Somewhat similar to paying back a loan to the company, the principal payback is not a tax deduction, only the interest payment.

[remozseo]

ok...hmm.. that means, based on my given example...

if the company makes 100k profit... they HAVE TO PAY FIRST corporate tax.
AFTER... they have 70k left....

and if the corporation decides to pay the MAXIMUM Dividends... they can obviously only pay 70k on Dividends... because that's what's left over.

I know it's a drastic example.. but I just wanted to make sure my example is correct and that I got it right.
Thank you !

[turboguy]

You got it right and the double taxation is one of the drawbacks of a C Corp that cause some to go with an S Corp or LLC.

[Freelancier]

Some corporations borrow money to pay dividends, so there's no real maximum dividend payout as long as they can get the money to pay the dividend.

But, yes, corporate taxes are paid on the profits of the corporation (AND some localities also tax the local assets of the corporation). And then the individual is taxed on any dividends you disburse. That's with a C corporation.

S corp, you are taxed on the profit at your personal tax rate, BUT you can take dividends instead of salary for some of the money and save yourself the payroll taxes (social security and medicare).

Like I said: you should spend a couple of hours with an accountant to get your structure figured out. Cost will be about $400, but the savings will be a lot more than that if you get the structure right.