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1 Jonathan Williams & Gerald Prante, Growing Amount of Business Income Taxed by the Individual Income Tax Code 1 (2006)

handle is hein.taxfoundation/fffgxz0001 and id is 1 raw text is: r:OuU NDAT10N.
May 8, 2006
Growing Amount of Business Income Taxed by the Individual Income Tax
Code
by Jonathan Williams and Gerald Prante
Fiscal Fact No. 56
A commonly overlooked trend affecting corporate and individual tax collections has been
the dramatic rise in alternative corporate structures, such as subchapter-S corporations
and sole proprietorships, and the way this rise has caused business-source income to
move from the corporate tax system into the individual income tax system.
These business structures are now taxed under different rules than traditional C
corporations, often making them more attractive to business owners who must decide
which tax path to take. While S corporations are similar to ordinary C corporations in that
they provide owners with such benefits as limited liability and freely transferable
ownership rights, unlike C corporations, all S corporation income is taxed through the
personal income tax code (using Schedules B, C, D, E, and F), not the corporate income
tax code.
This is important for two reasons. First, income earned through an S corporation or sole
proprietorship is taxed only once-just as any regular income such as wages-whereas
income earned through a C corporation is taxed twice: once through the corporate income
tax, and again when investors pay individual income taxes on dividends or capital gains.
Second, as the percentage of business activity conducted through S corporations and sole
proprietorships increases, an increasing amount of tax will be collected through the
personal income tax compared to the corporate income tax. This is difficult to see right
now because corporate income tax revenue is experiencing an almost unprecedented
boom, mostly a result of a strong economy. (Please see related Fiscal Fact at
http :/iiwvwv.taxfouidation.orgipublications/show1478.html.)
Rapid Growth in S-Corps and Sole Proprietorships
Since S-corp earnings are taxed only once at the individual owner's level, the double
taxation of earnings is eliminated. S corporations agree to certain limitations in exchange
for this benefit, including limiting shareholders to 75 or fewer and limiting ownership to
U.S. citizens and resident aliens.

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