Shareholders of Closely Held C Corporations Frequently Engage in Transactions

Essay

Shareholders of closely held C corporations frequently engage in transactions that produce a tax benefit to the corporations. In many cases, shareholders receive compensation for employment with closely held corporations, and such payments generate a deduction for the corporations. To avoid the double taxation effect, shareholders generally prefer these and other corporate deductible payments over dividend distributions. Explain how this strategy avoids double taxation, including examples of other shareholder-corporation transactions that could be used for such purpose. Also, discuss the possible pitfalls surrounding corporate payments to shareholders.