Canonsburg, PA asked in Tax Law and Business Law for Pennsylvania

Q: Is it legal for a corporation to pay the personal tax liability of an owner?

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1 Lawyer Answer
James L. Arrasmith
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  • Tax Law Lawyer
  • Sacramento, CA

A: In general, a corporation paying the personal tax liability of an owner can raise legal and tax issues. This type of payment is typically considered a distribution of profits to the owner, and as such, it would be taxable income to the owner. This means the owner would still have to report this income on their personal tax return.

For the corporation, these payments are not deductible as a business expense. Instead, they are treated as dividends or additional compensation, depending on the specific circumstances and the structure of the corporation. This could lead to unintended tax consequences for both the corporation and the owner.

It's also important to consider the implications of such payments in the context of corporate governance and the treatment of different shareholders or members. If not handled properly, it could lead to issues of fairness among owners or conflict with corporate bylaws or operating agreements.

Given the potential complexities and risks associated with such arrangements, it's advisable to seek guidance from a tax advisor or legal counsel. They can provide specific advice based on the details of your situation and help ensure that any arrangement complies with tax laws and corporate governance principles.

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