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Professional Corporation Tax Advantages



A professional corporation (PC) is a type of corporation available to business entrepreneurs who offer professional services such as doctors, lawyers and engineers. PCs were formed to allow professionals to enjoy the tax advantages of a corporation without providing them with the benefit of limited liability. The main tax advantages of being a PC are tax breaks and tax deductions not available to unincorporated businesses.

Personal Service Corporations

o    PCs are generally created so a business can qualify as a personal service corporation (PSC). The Internal Revenue Service (IRS) will consider professional corporations as a PSC as long the business passes the function and ownership tests. The function test requires that 95 percent of the activities carried out by the business are services within the fields of health, law, accountancy, engineering, science, consulting or performing arts. The ownership test requires that the business' stock be owned by qualified people who either work or used to work for the corporation.

PSCs are taxed as a class C corporation with a flat rate of 35 percent. Salaries are considered tax deductible expenses. Professional corporations will usually pay all income as salaries to shareholders or other kinds of benefits, reducing taxable income to zero.

 

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