In a C-corporation (C-corp), double taxation refers to the taxation of corporate profits at two levels: first at the corporate level, and again at the individual level.

How double taxation works:

Corporate Taxation:

• C-Corps file their own tax returns and pay their own income tax a corporate flat rate of 21% and 8.84% California.

Dividend Distribution:

• When a C-Corp distributes its profits to shareholders in the form of dividends, these dividends are not deductible as a business expense for the corporation, but are taxed to the individual.

• Shareholders receiving dividends must report these dividends as part of their personal income on their individual tax returns (at rates as high as 54.1% for Californians (Fed 37%, NIIT 3.8%, CA 12.3% max tax brackets). 

Retained Earnings:

• Owners can’t leave earnings in the corporation to avoid the double taxation or they can incur a 20% accumulated earnings tax.

Avoiding the double taxation:

Make an S-Election:

• Business owners often consider other structures, such as S-Corps or LLCs, to potentially avoid double taxation. These are pass-through entities (PTE) where profits are not taxed themselves, but instead "pass through" to the owners' personal tax returns, potentially reducing the overall tax burden.

• The income is then taxed at the higher individual tax rates.

• Eligible taxpayers can deduct up to 20% of their qualified business income that passes through to their personal return.

Make Payroll to Owners:

• Paying higher salaries to shareholders instead of distributing profits as dividends. This reduces the corporation's taxable income because salaries are deductible.

• The salaries paid should be justifiable based on the services provided to the company. Excessively high salaries might raw scrutiny from tax authorities. Determining appropriate salary levels requires careful consideration and compliance with tax regulations.

• Salaries are subject to payroll taxes, unlike dividends. This may increase the tax burden for both the corporation and the recipient of the salary, and are taxes at the higher individual tax brackets.

• Choosing higher salaries over dividends can help reduce double taxation to some extent, but it's crucial to assess the overall tax impact, legal compliance, and financial implications for the business and its shareholders before implementing this strategy.