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If you decide to use an Idaho C corporation to operate your newly acquired business, you should know that the current federal income tax system treats corporate debt more favorably than corporate equity.

Debt is Key

So, including some third-party debt (owed to outside lenders) and/or some owner debt (owed to yourself) in your corporation’s capital structure is a tax-savvy move.

Even if you could afford to cover the entire cost of the new business with your own money, tax considerations may make this inadvisable.

  • That’s because a C corporation shareholder generally cannot withdraw part of his or her equity investment without worrying about the dreaded double taxation.
  • If the corporation has current or accumulated earnings and profits, all or part of the withdrawal will be treated as a taxable dividend.
  • You want to avoid dividends if you can.

Double Taxation Problems

Taxable dividend treatment means taxable income for you without any offsetting deduction for your corporation, which is after your corporation has already been taxed on its profits. This is double taxation in all its glory.

How to Avoid

When third-party debt is used in your corporation’s capital structure, it becomes less likely that you will need to be paid taxable dividends.

  • The corporation’s cash flow can be used to pay off the debt, and when the debt is paid off, you will own 100 percent of the corporation with a smaller investment on your part.

Idaho Corporation Double Taxation Explained

People commonly refer to the C-corporate tax system as being double-taxed.

The more accurate way to describe corporate tax is as a “two-tier tax system.”

With corporate tax, the same government taxes two different taxpayers: 

  1. the corporation and the
  2. shareholder

Here is how it works. If you own an Idaho corporation, the government taxes both you and your corporation:

  • First, the Idaho corporation pays income tax at corporate rates.
  • Second, you, as a shareholder, pay tax on the dividend you receive from the Idaho corporation