Tax Benefits of ‘C’ Corporations Business Failure

“C” Corporation

The “C” in C corporation has a few legal ramifications, but it is primary a designation for tax purposes. Put in layman’s terms, the designation simply means the corporation will act as its own tax entity. To become a shareholder in the corporation, you must exchange property, cash or services in exchange for stock.

The Internet Revenue Code sets out the law on tax and it contains a few juicy provisions for corporations. In the case of a business failure, the code delineates some favorable tax write-offs for the investment you made in stock.

Taking A Loss

Assume you and I go come to the conclusion that we can start a new search engine that will wipe Google, Yahoo and MSN off the map. Noting the litigious nature of those companies, a lawyer advises us to form a C corporation. We do so and each of us contribute $20,000 in cash for stock. In exchange for our contribution, we receive shares totaling 90 percent of the shares issued by the corporation. We are ready to go.

After a year passes, we come to realize that the search engine game isn’t so easy. In fact, the corporation is broke and neither of us are going to throw any additional funds at this turkey of a business. We decide to close shop and swear to never speak of the venture again.

From a tax perspective, all is not lost in the above scenario. When it comes time to file taxes, each of us will be able to deduct all or part of the $20,000 we spent to acquire stock in the C corporation. The specific percentage is going to depend on your exact situation, but you can expect to get a sizeable deduction.

As always, there are qualifies and restrictions to this write-off. Make sure you speak with a tax professional, so you can at least get something out of that turkey of a business.

Richard Chapo is with – providing legal services to San Diego businesses.

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