Friday, June 28, 2013
Mark P. Keightley
Specialist in Economics
In the United States, how a business is taxed at the federal level is partly dependent on how it is organized. The income of subchapter C corporations, also known as “regular” corporations, is taxed once at the corporate level according to the corporate tax system, and then a second time at the individual-shareholder level according to the individual tax rates when corporate dividend payments are made or capital gains are recognized. This leads to the so-called “double taxation” of corporate income. Businesses that choose any other form of organization are, in general, not subject to the corporate income tax. Instead, the income of these businesses passes through to their owners and is taxed according to individual income tax rates. Examples of these alternative “pass-through” forms of organization include sole proprietorships, partnerships, subchapter S corporations, and limited liability companies.
This report summarizes the general tax treatment of corporate and pass-through businesses. The intent is to introduce those who are unfamiliar with the current U.S. business tax environment to the basics of corporate and pass-through taxation. Understanding how various businesses are taxed provides a starting point from which one can evaluate current and future proposals to change the taxation of corporations and pass-throughs. Additionally, since pass-through income is typically taxed only at individual income tax rates, this report is also a useful starting point for understanding the effects on pass-through businesses from a change to individual income tax rates. A list of related CRS products on business taxation may be found at the end of the report.
Date of Report: June 12, 2013
Number of Pages: 12
Order Number: R43104
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Posted by Penny Hill Press, Inc. at 8:59 AM