| exceeded disadvantages sale business expansion share
treated insurance
|
When the maximum corporate tax rate was less than the maximum individual tax rate, the corporate form was desirable despite the threat of a double tax. If corporate profits were reinvested in 1__________ of the business rather than paid out in dividends, the corporation could serve as a tax shelter. The shareholder’s interest in the retained earnings was not taxed until the stock was sold or the corporation was dissolved. Then, the shareholder was taxed at a capital gains rate, which was lower than the ordinary income rate applied to dividends. However, in 1988, for the first time in history, the maximum corporate tax 2__________ the maximum individual rate. This strengthened the threat of double taxation and discouraged the use of the corporate form of business.
Still, there are tax strategies that can minimize such 3___________. When the corporation is involved in a business that has wide swings in income from year to year, it can reduce the tax burden experienced by shareholders by keeping the dividend rate constant. Partners and sole proprietors, on the other hand, will be individually taxed on their 4_________ of the income during the year in which it was earned.
The corporation tax burden can be lessened if the shareholders are active in the operation of the 5_________. Shareholder-employees may be paid salaries that, although taxable as income to the shareholders, are deductible expenses for the corporation. Also, fringe benefits, such as pension plans or health 6__________, can be provided to shareholder-employees if furnished to other employees. The cost can be deducted by the corporation, and there is no immediate taxation to the employees of the value to them of the plans. In contrast, partners are not 7__________ as employees. Their benefits, as well as their drawings or salary, are viewed as distributions of partnership profits.
A tax advantage of corporations may be realized when the business is sold. A tax-free transaction is possible when the shares of a corporation are exchanged for shares of another corporation. The shareholders of the acquired corporation then become shareholders of the acquiring corporation without being required to pay a capital gains tax at that time. On the other hand, a 8_________ of the business of a sole proprietorship or a partnership is usually a taxable transaction. If the sale is for an amount greater than the net book value of the business, an immediate capital gains tax will be due.
