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Now C This

IRS rules limit the tax benefits of C corporations.

Thinking about restructuring your C corporation? IRS rules enable C corps, or companies whose profits are taxed separately from those of their owners, to carry any losses back two years and forward for a generous 20 years. "But there's a catch," says Steve Hopfenmuller, CPA and founder of www.smbiz.com, a website dedicated to tax guidance for SMBs. "A significant ownership shift in the corporation limits those losses."

For tax purposes, a significant ownership shift is defined as a change of more than 50 percentage points of ownership by a major stakeholder within a three-year period. If such a shift occurs, "Annual net operating loss carry-overs would be limited to an amount equal to the federal long-term tax-exempt interest rate [a number published monthly by the IRS] times the fair market value of the stock at the time of the ownership shift," explains Hopfenmuller. "For example, if the stock were worth $1 million at the time of transfer and the interest rate [at that time] was 4 percent, the company could use only $40,000 of carry-forward net operating losses every year."

These rules are meant to discourage the purchase of C corps purely for tax-loss purposes, says Hopfenmuller. "Keep in mind that any significant sale of stock in a C corporation requires a check with your [tax] advisor."

Jennifer Pellet is a New York City freelance writer specializing in business and finance.

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This article was originally published in the July 2006 print edition of Entrepreneur with the headline: Now C This.

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