Corporations 101: Double Taxation, Write-Offs, and Fringe Benefits

My corporations 101 series, which began with a look at roles, responsibilities and structure, continues. Let’s talk today about C corporations and money matters. When you create a C corporation, you’re establishing an entity that is legally independent of its shareholders and managers. The IRS views this entity as a “legal person” that can do business and make contracts.

Most big brand companies are C corporations, and for good reasons: They can write off losses in one year by carrying these negative earnings into the previous or next year, and their owners’ financial liability is limited to their investments in the company.

The biggest drawback? Different from LLCs or S corporations, which are so-called pass-through entities, C corporations must pay taxes on their net income. (The actual tax burden varies, depending on where a business incorporates. But generally speaking, state, income, payroll, unemployment and disability taxes come due.) In addition to the corporate tax, there’s the individual tax burden for corporate shareholders and employees. This means that corporate profits carry a double tax burden.

Are there ways to avoid this double taxation? Yes; C corporations can claim a variety of deductions ranging from salaries and bonuses to rents, repairs and maintenance. They can also offer their employees medical benefits. Health insurance is one possibility. A Health Reimbursement Arrangement (HRA) is another.

The beauty and usefulness of HRAs

With an HRA, the employee buys individual health insurance, and the corporation reimburses him or her for medical expenses not covered by the insurance policy, including copays, deductibles and premiums. These plans, which are IRS approved, come with a double benefit. The corporation can write off its reimbursements to the employee as a business expense, and the employee need not pay income tax on the fringe benefit.

The expenses that the IRS considers fit for reimbursement run the gamut. The pertinent IRS documentation states in general terms: “Medical expenses are the costs of diagnosis, cure, mitigation, treatment or prevention of disease, and the costs for treatments affecting any part or function of the body.”

More specifically, the reimbursable expenses include physicians’, dentists’ and other medical practitioners’ fees, and money that a patient pays for transportation to these providers. The cost of equipment, supplies and diagnostic devices also falls into this category, as do the amounts paid for qualified long-term care services. Vitamins and vacations don’t count, beneficial though they may be for your health.

By Kevin J. Moore

Kevin Moore, Founder of Kevin J. Moore & Associates, is focused in the areas of estate planning, trusts and probate services with additional expertise in both domestic and international business transactions and tax planning and tax controversy representation for individuals and companies.