taxes, investment, delawareI have a Delaware C-Corporation. But i’m not sure much about taxes.
If an investor invest 1 million USD in my company and if the company spend only half million USD in current year expenses, Does that mean the company need to pay taxes for remaining half million USD?
No, money invested into a company (referred to as paid-in capital) is not income for income tax purposes. IRS Publication 542 gives a general overview about corporate taxation. On page 5, under Capital Contributions you will find:
Paid-in capital. Contributions to the capital of a corporation, whether or not by shareholders, are paid-in capital. These contributions are not taxable to the corporation.
The IRS also publishes Publication 525 which goes into some more detail about taxable and non-taxable income. As a C-Corporation, you will be filing IRS Form 1120 (there are Form 1120 instructions). You can look over that to get a broad idea of how income tax is calculated.
Don’t try to do this yourself. American tax law is one of the most complicated things ever created by man-kind. Just get a general overview of corporate tax and hire a qualified tax advisor. It is preferable to meet with your tax advisor before doing business as proactive tax planning can save your business a lot of money.
There may be an exception for a rare edge case: If your primary business is an illegal Ponzi scheme (in other words, you treat paid-in capital as revenue rather than capital), the IRS may choose to treat investor’s money as taxable income. Understand, the IRS doesn’t care if your business is legal or not, and substance matters more than form.
When everything is done by the book the answer by Tom is great. There are other cases though. I hope it’s relevant.
For instance, you have a startup in marketing business. Your investor is a marketing agency that wants to expand and sends you a 1M check.
That check may come from the agency as a capital investment. The agency made 2M last year, paid 30% taxes on it and using 1M out of remaining 1.4M to invest in your startup. In this case Tom’s answer explains how it works.
A sneaky agency, however, may want to write it off its books as a marketing expense. They are in marketing business, so they can claim it as a payment for marketing services subcontracted to your startup. This way the agency will avoid taxation. Out of 2M profit they will write off 1M as an expense and save 300K. So it’s like if the invested only 700K.
In the latter case your startup has to show 1M as an income. You can write off your expenses, but any excess cash will be considered a profit of your startup. At this point you’ll be required to pay taxes on the difference.
It may look crazy to you, but it’s a huge gray area what’s considered to be a paid for service vs. a capital investment. The devil is often in the details.
Continuing with the same example: Your startup can provide certain marketing services to the marketing agency for 1M and use the income not only to serve the paying client, but also to expand its technology, etc.
You may want to agree to that sneaky kind of investment if there’s legal way to do it. Just make sure you clarify it with the investor beforehand.
Lastly, you have no way of knowing how your investor has your 1M check in its books. This means you better have enough data to proof what the check was for.
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