Northwest Brands, Inc., is a small business incorporated in Minnesota. Its one class of stock is owned by twelve members of a single family. Ordinarily, corporate income is taxed at the corporate and shareholder levels. Is there a way for Northwest Brands to avoid this double-income taxation? Explain your answer.
They can avoid double taxation by checking the box on the foreign corporation, via Form 8832, [ electing to be classified as a partnership status.(preferably an LLC or an S-Corporation the effect is the same) Thus all income/losses will flow through to the shareholders/members and will not be taxed at the "Corporate/Partnership" level. The shareholders/members will report their proportionate
share of income/gains/losses on thier individual income tax returns and be subject to taxation.
There is an issue if the corporation has built in gains. When the corporation checks to partnership it is considered to have been liquidated.If the there are gains inside the corporation at liquidation then the corporation will pay tax at the highest marginal rate.
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