How To Avoid Double Taxation - Guide for US Business Owners

This publication is provided for general information purposes and does not constitute legal, tax or other professional advice from Wise US Inc. or its affiliates, and it is not intended as a substitute for obtaining business advice from a Certified Public Accountant (CPA) or tax lawyer.

If you're a U.S. business owner, the words “double taxation” might send a chill down your spine, and that’s totally understandable. Paying taxes once is enough, but paying them twice on the same income? That can seriously eat into your profits.¹ The good news is that there are smart, legal ways to avoid getting taxed twice.² But with the IRS watching and rules that can get confusing fast, it’s important to know what you’re doing.

Let’s take a look at exactly what double taxation is, when it applies, and most importantly, how you can avoid it.

Managing international business payments?
Try Wise Business ->

What is double taxation?

Double taxation happens when the same income gets taxed twice. For U.S. business owners, this often pops up with corporations, especially C corporations. ³ Here's how: the company earns a profit and pays corporate tax on it. Then, when those profits are distributed to shareholders as dividends, the individuals receiving them pay personal income tax on the same money. Yes, taxed twice.¹

This is different from how pass-through entities (like LLCs or S corps) are taxed. With those, income “passes through” to the owners’ personal tax returns, skipping the corporate tax layer altogether.⁴

Double taxation can chip away at your profits if you’re not careful. However, it is often avoidable.²

Are corporations double-taxed?

Yes, corporations can be double taxed, but it depends on the type. When people talk about “Are corporations double taxed?” they’re usually referring to C corporations.⁵ Here’s how it works: first, the corporation pays taxes on its profits at the corporate level. Then, if those profits are distributed to shareholders as dividends, the shareholders pay taxes on that income, too. That’s the “double” part.³

Now, not all corporations face this. For example, S corporations are structured differently. They’re considered “pass-through” entities, meaning the company’s profits are passed directly to the owners' personal tax returns, avoiding corporate-level tax altogether.¹

That’s why it’s essential to choose the right business structure when opening a business, especially come tax time.⁵

---

Wise Business Could Help You Save on Global Business Payments

---

Which corporate structure avoids double taxation

One big question you’ll face is which corporate structure avoids double taxation? This happens when both your business and you (as the owner) get taxed on the same income. Not fun, right? There is a way around it, though. One of the most popular structures that avoids double taxation is an S Corporation (S Corp). With an S Corp, the business itself doesn’t pay federal income tax. Instead, profits “pass through” to your tax return, and you pay taxes just once, at your individual rate.²

But let’s take a deeper look at corporate structures and how you can avoid double taxation by choosing the right structure.

Sole Proprietorship

A sole proprietorship is the simplest and most common business structure, especially for solo entrepreneurs. It’s easy to set up and doesn’t require formal registration (unless your state says otherwise). However, the business isn’t a separate legal entity; you and the business are one and the same. That means you report business income on your personal tax return and pay self-employment taxes. While this structure avoids double taxation, it also means you’re personally liable for any debts or legal issues.⁴

It’s a great starting point for freelancers or small-scale side hustlers, but as you grow, you may want to consider something that offers more protection, like an LLC or corporation.

Limited Liability Company (LLC)

An LLC is a flexible structure that gives you the legal protections of a corporation but the tax simplicity of a sole proprietorship or partnership. It’s a popular choice for small to medium-sized businesses. The “limited liability” part means your personal assets are generally protected if your business faces lawsuits or debts.

In terms of taxes, an LLC can choose how it wants to be taxed, as a sole proprietorship, partnership, S Corp, or even a C Corp. Most LLCs opt for pass-through taxation, meaning business income is only taxed once, on your personal return.¹

S Corporation (S Corp)

An S Corporation is not a business entity type per se; it’s a tax classification you elect with the IRS, usually after forming an LLC or corporation. The main draw of an S Corp is that it allows pass-through taxation, avoiding double taxation.² Profits and losses flow through to the owners' personal tax returns, and the business itself doesn't pay federal income tax. Another thing to note, S Corp owners can pay themselves a “reasonable salary” and take additional profits as distributions, which aren’t subject to self-employment tax.⁵

Best practices for corporate tax reduction

Let’s be honest here, no one enjoys paying more taxes than they have to, especially business owners. But with the right planning, you can legally reduce your corporate tax burden and keep more of your hard-earned profits.⁴ We recommend engaging in the following tax reduction practices if you want to keep more of your hard-earned money.

Choose the Right Business Structure

One of the most effective ways to reduce your tax burden starts with choosing the right corporate structure. Different entities are taxed differently. For example, C Corporations are subject to double taxation, once at the corporate level and again on dividends, while S Corporations and LLCs (with pass-through taxation) typically avoid that second layer.⁵

If you're operating as a sole proprietorship, you might be missing out on tax advantages like self-employment tax savings available to S Corp owners.²

Take Full Advantage of Deductions and Credits

You might be surprised by how many legitimate business expenses you can deduct, and how often they’re overlooked. Here are a few Common business deductions and tax credits to consider:

Common Business Deductions

• Office rent
• Business insurance
• Equipment
• Software
• Travel
• A portion of your home (if you have a home office)

Tax credits to consider:

• R&D (Research & Development) credit
• Employee Retention Credit
• Incentives for offering healthcare
• Green energy or sustainability incentives³

The IRS provides tools to help reduce your tax bill; you just need to know how and when to use them to receive the maximum benefits.³

(Expense reimbursement strategies may also play a role in reducing taxable income, though not directly mentioned here.)

Defer Income and Accelerate Expenses (Strategically)

Timing is everything, especially when it comes to taxes. One simple but powerful tactic is deferring income and accelerating expenses. If your business is having a strong year, you might choose to delay sending invoices until January, pushing that income into the next tax year. At the same time, you can prepay for expenses like rent, supplies, or software before the end of the year to increase your deductions now.³ This strategy works best for cash-basis taxpayers, but even accrual-basis businesses can benefit with proper planning.

Final Thoughts

Avoiding double taxation will not only help you save money, but it will also help you run a smarter, more efficient business.⁴ When you choose the right business structure, understanding how profits are taxed and working with a trusted tax advisor can legally reduce your tax liability and keep more of what you earn.² There’s no one specific approach, but with the right planning, you can protect your profits and avoid paying twice on the same dollar.¹

Save Time and Money On Overseas Payments With Wise Business

Wise Business can help you save big time on international payments.

Wise is not a bank, but a Money Services Business (MSB) provider and a smart alternative to banks. The Wise Business account is designed with international business in mind, and makes it easy to send, hold, and manage business funds in currencies.

Signing up to Wise Business allows access to BatchTransfer which you can use to pay up to 1000 invoices in one go. This is perfect for small businesses that are managing a global team, saving a ton of time and hassle when making payments.

Some key features of Wise Business include:

• Mid-market rate: Get the mid-market exchange rate with no hidden fees on international transfers

• Global Account: Send money to countries and hold multiple currencies, all in one place. You can also get major currency account details for a one-off fee to receive overseas payments like a local

• Access to BatchTransfer: Pay up to 1000 invoices in one click. Save time, money, and stress when you make 1000 payments in one click with BatchTransfer payments. Access to BatchTransfer is free with a Wise Business account

• Auto-conversions: Don't like the current currency exchange rate? Set your desired rate, and Wise sends the transfer the moment the rate is met

• Free invoicing tool: Generate and send professional invoices

• No minimum balance requirements or monthly fees: US-based businesses can open an account for free. Learn more about fees here

Use Wise Business >>

---

Frequently Asked Questions (FAQs)

Can partnerships be subject to double taxation?

No, partnerships are generally not subject to double taxation. In a partnership, the business itself doesn't pay income taxes. Instead, the profits and losses are "passed through" directly to the individual partners, who report the income on their personal tax returns.¹ This means the income is only taxed once, at the individual level. However, partners do have to pay self-employment taxes on their share of the income.²

Does reinvesting profits back into the business help avoid double taxation?

Yes, it can. In a C Corporation, profits that are reinvested into the business instead of distributed as dividends generally avoid the second layer of taxation.³ Only when those profits are paid out to shareholders as dividends do they get taxed again at the individual level.¹ However, holding on to too much retained earnings without a business reason can trigger IRS scrutiny, so it’s important to document your intent and consult with a tax professional for safe planning.²

How does foreign income impact double taxation for U.S. business owners?

Foreign income can lead to double taxation if both the foreign country and the U.S. tax the same income.³ Fortunately, the U.S. offers tools to reduce this burden. The Foreign Tax Credit allows you to subtract foreign taxes paid from your U.S. tax bill.³

Many countries have tax treaties with the U.S. to prevent or reduce double taxation.⁴ That said, international tax rules are complex and vary based on the country and income type. If you have overseas operations or investments, it’s critical to work with a CPA or tax advisor who understands international tax compliance and how to avoid double taxation on foreign income.²

What role do legal agreements (like operating agreements or bylaws) play in tax treatment?

Legal agreements like operating agreements (for LLCs) or bylaws (for corporations) don’t directly control how your income is taxed, but they play an important supporting role.⁵ Documents such as an outline of how your business is run, how profits are distributed, and how decisions are made. If the IRS ever audits you or questions your tax classification, especially with S Corps or multi-member LLCs, a clear, well-drafted agreement can help validate that you’re operating as a legitimate business and not just trying to skirt taxes.²

---

Sources:

1. What is double taxation and how to avoid it | SmartAsset
2. Avoiding double taxation: strategies for business owner compensation | Cunningham & Associates
3. What is double taxation: How it works & ways to avoid it | Taxes for Expats
4. What is double taxation | National Funding
5. How are C corporations taxed? | Thomson Reuters