My Queue

There are no Videos in your queue.

Click on the Add to next to any video to save to your queue.

There are no Articles in your queue.

Click on the Add to next to any article to save to your queue.

There are no Podcasts in your queue.

Click on the Add to next to any podcast episode to save to your queue.

You're not following any authors.

Click the Follow button on any author page to keep up with the latest content from your favorite authors.

Now C This

IRS rules limit the tax benefits of C corporations.
- Magazine Contributor
2 min read

This story appears in the July 2006 issue of Entrepreneur. Subscribe »

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.

4 Ways Modern Entrepreneurs Break Through Old Barriers to Start New Businesses