Can I invest C-corp or S-corp profits by purchasing stock, bonds or property to reduce tax liability?

Question

If I own a C-corp or an S-corp in the US ( say for example Delaware ), and I take profits from revenue after expenses for the corporation and purchase stock in the US stock markets, bonds or other investment property without selling any of those investments purchased by the time of tax filing, would that reduce my corporation's total tax liability?

Answer 1

This is a very complex question which is unlikely to be appropriately answered in a post. Please consult a professional tax accountant or lawyer before making business decisions like this.

To answer the first part of this question, C-corporation and S-corporations can buy and sell stocks, bonds, etc just like a person. They are legal entities capable of carrying out transaction as an entity.

The tax implementation of this varies greatly by the type, nature and facts of each entity. Keep in mind the kind of transaction that occurs when investing in stocks or bonds. For example, if Company A invests $10,000 in the stock of Company B, the transaction MIGHT look like this on the books of Company A:

Dr. Investment in Company B $10,000

Cr. Cash $10,000

Note that 'Investment in Company A' is likely an asset account, not an expense. Also, (for GAAP) you have to consider if the account is classified as "Held-to-Maturity", "Available-for-Sale" or "Held-for-Trading". All of these will have an impact on your financial statements.

Another issue is if your company is in the business of buying and selling stocks, bonds, etc or if this is just a passive investment for your company. The IRS rules differ depending on the nature of the transaction. You will need to refer to the Internal Revenue Code for specific guidance on these matters.