Getting Cash Out of a C Corporation: Taxable & Tax-Free Strategies

Extracting cash from a C corporation requires strategic planning to avoid excessive taxation. Here’s how business owners can do it efficiently:

Taxable Methods

Dividends – Paid from after-tax earnings, taxed at capital gains rates (15-20% + NIIT), and not deductible by the corporation.

Salary & Bonuses – Deductible by the corporation but subject to payroll taxes (Social Security & Medicare), increasing overall tax costs.

Rent Payments – If a shareholder rents property to the corporation, the corporation can deduct rent payments, while the shareholder reports rental income.

Interest on Shareholder Loans – Structured properly, interest payments are deductible by the corporation and taxed as ordinary income to the shareholder.

Tax-Free Methods

Loan Repayments – If a shareholder previously loaned money to the corporation, repayments are not taxable as long as they meet loan documentation requirements.

Reimbursement of Business Expenses – If properly documented under an accountable plan, reimbursements for business expenses are tax-free.

Fringe Benefits – Certain employee benefits (health insurance, retirement contributions, educational assistance) can be provided tax-free to shareholders who are employees.

Stock Redemptions (Under Sec. 302 & 303) – If properly structured, redemptions can be treated as capital gains rather than taxable dividends.

Liquidation (Sec. 331/332) – Distributions upon dissolution may qualify for capital gains treatment, avoiding dividend treatment.

Planning Considerations

Poor planning can lead to double taxation or IRS scrutiny. The best method depends on factors like corporate earnings, shareholder tax situation, and long-term exit strategies.

How AJB & Associates CPAs Can Help

At AJB & Associates CPAs, we specialize in tax-efficient strategies for corporate cash withdrawals. Visit ajbcpas.net for expert guidance tailored to your business needs.