How to Take Money Out of Your C Corporation Without Paying Twice

If your family business operates as a C corporation, watch out for double taxation whenever you withdraw cash from the company. If the corporation has current or accumulated earnings and profits, the IRS generally considers payments to shareholders to be taxable dividends — unless there’s proof payments were for another purpose (such as compensation for services).

The problem is that dividends mean double taxation. Your corporation gets taxed once on income that produces the dividend and you get taxed again when you receive it. Fortunately, there are strategies to prevent double taxation. Here are five to consider.

1. Include Third-Party Debt in the Corporation’s Capital Structure

Occasionally, your company may need cash to pay for capital improvements or to finance growing levels of receivables and inventory. You generally have two choices: 1) Inject your own cash into the company; or 2) arrange for the company to borrow the money from a third-party lender. From a tax perspective, it’s usually better to go the loan route. There’s less chance you’ll need to withdraw double-taxed dividends later on because you have less of your own cash tied up in the business.

Tip: Be sure third-party loans are taken out in the corporation’s name, not yours. If you borrow personally and then contribute the loan proceeds to the company’s capital, you may be forced to withdraw taxable dividends later to pay the personal loan’s interest and principal.

2. Don’t Contribute Capital — Make Company Loans

Let’s say you and the other shareholders have more than enough cash to personally fund your family C corporation’s growing capital needs. In that case, it’s generally wise to include debt in your company’s capital structure (as opposed to contributing more equity capital). Arrange for the debt to be owed to you and other shareholders personally, rather than to a third-party lender. This way, you’ll receive taxable interest payments on the loan without double taxation because your corporation receives an offsetting interest expense deduction. You’ll also collect tax-free principal payments on the loan. In contrast, if you make a capital contribution and then need to withdraw cash from the business later on, withdrawals may effectively be double taxed.

3. Charge Your Corporation for Guaranteeing its Debt

As a shareholder of your family C corporation, you may be required to guarantee company debt. When this happens, consider charging the company a fee. You deserve to be compensated for issuing a guarantee that puts your personal assets at risk. (The guarantee fee is a deductible expense for the company.) Of course, you’re taxed on the fee you receive, and it must be reasonable. However, double taxation is avoided because the company gets an offsetting deduction. You can continue charging the fee as long as the guarantee remains in force. (Source: Tulia Feedlot, Inc. v. U.S.,Ct. Cl. 1982)

Tip: Corporate minutes should reflect that you demanded a guarantee fee.

4. Lease Assets to the Company

It’s generally not a good idea for your family C corporation to own assets that are likely to appreciate in value. If the company later sells an appreciated asset and distributes the profit to you, it could be treated as a double-taxed dividend.

A smarter tax alternative is to keep personal ownership of business assets that are expected to appreciate (such as real estate). Then, lease the assets to your C corporation. If other family members are also shareholders, set up a partnership or LLC to own the assets and lease them to the company. The payments are a deductible expense for the corporation, so cash comes to you in the form of lease payments without double taxation.

For you personally, the lease payments are taxable income. However, you may be able to claim offsetting deductions for depreciation or amortization, interest expense on mortgaged assets and property taxes. Even better, if the asset is eventually sold for a profit, you won’t be hit with double taxation.

5. Collect Generous Company-Paid Salary and Perks

Two more ways to avoid double taxation are with:

• Salary and bonus paid to you as a shareholder-employee of your family C corporation, and
• Company-paid fringe benefits provided to you as a shareholder-employee.

As long as the salary, bonus and benefits represent reasonable compensation for your services, the company can deduct them as business expenses. Plus, some company-paid benefits are tax-free to you (such as contributions to a qualified retirement plan and health insurance coverage).

Beware: When a shareholder-employee receives a generous package of salary, bonuses and benefits from a closely held corporation, the IRS might claim the compensation is unreasonably high. The IRS could then argue that excess amounts are actually disguised dividends subject to double taxation. Consult your CPA to discuss reasonable compensation and how to avoid double taxation when withdrawing cash from a C corporation.

Copyright 2025

This article appeared in Walz Group’s September 15, 2025 issue of The Bottom Line e-newsletter, produced by TopLine Content Marketing. This content is for informational purposes only.