As a result, the corporation pays taxes on its net income. Reasonable salaries are deductible to the corporation and taxable to the employees, including shareholders and employees. Because a C corporation is a taxable entity, the income is exposed to the possibility of double taxation. One way to avoid double taxation is to retain corporate earnings and profits in the corporation for reinvestment. However, this can potentially lead to higher marginal taxation, and to a penalty tax called the accumulated earnings tax if the earnings retained are beyond the reasonable needs of the business.
C corporations are also potentially subject to an alternative minimum tax .
A C corporation can deduct the cost of employee benefits for non-owner employees. A shareholder can be considered an employee for income tax purposes. Finally, income can be shifted to family members by making them employees of the corporation. Appreciation can also be shifted to family members as a way to minimize death taxes when an owner dies. Related Terms S corporation, closely-held corporation, professional corporation.