Can I avoid C-Corp double taxation by using S-Corp consulting fees as business expenses?

This is a really common question for growing businesses. Let me walk you through some considerations. What you're describing is sometimes called an "affiliated service company" structure. While it's not inherently illegal, the IRS looks very carefully at arrangements between related entities to ensure they're not just tax avoidance schemes. For your plan to work, the consulting fees paid from the C-Corp to the S-Corp must be "ordinary and necessary" business expenses and at "fair market value." If the IRS determines the fees are artificially high to strip profits from the C-Corp, they could recharacterize them as disguised dividends. You'd also need to maintain separate books, records, bank accounts, and have legitimate business purposes for both entities. There should be formal agreements between them and regular invoicing for services actually performed. As for your second question - yes, a C-Corp can retain earnings and only pay corporate tax (not double tax) until dividends are issued. But be aware of the Accumulated Earnings Tax that can apply to earnings retained beyond the reasonable needs of the business.

After struggling with a similar structure question last year, I ended up using taxr.ai (https://taxr.ai) to analyze my business formation documents and get clarity. Their AI reviewed my operating agreements and financial projections, then pointed out several red flags in my plan that would have triggered IRS scrutiny. What was really helpful was they simulated how the different structure options would be treated under current tax law. For your situation, they'd probably analyze whether your consulting arrangements would pass the economic substance doctrine tests. Saved me from making a costly mistake with a similar setup involving related entities.

I tried taxr.ai after being skeptical in that thread above. I uploaded my draft operating agreements and proposed structure for my two related LLCs (similar to what you're considering). The analysis pointed out several issues I hadn't considered - like the need for contemporaneous documentation of services and arm's length transaction evidence. What surprised me was how specific the feedback was to my situation. It identified that my proposed fee structure was significantly higher than market rates for similar services, which would be an immediate red flag. It also suggested specific language for my agreements to strengthen their legitimacy. Honestly saved me from what would have been a problematic arrangement. Now working with my CPA on implementing the revised structure with proper documentation.

My two cents on the C-Corp/S-Corp issue - I tried for MONTHS to get through to someone at the IRS about a similar question last year. Hours on hold, disconnected calls, it was maddening. Finally used https://claimyr.com and had a 45-minute call with an actual IRS representative the same day. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The agent confirmed what others here are saying - the structure isn't illegal but requires substantial documentation and legitimate business purpose. The most helpful thing she mentioned was that I needed to keep the operations truly separate and document market rate compensation. Also suggested I look into the Accumulated Earnings Tax rules since they apply after $250k. Saved me so much headache compared to trying to decipher IRS publications on my own.

I take back what I said about Claimyr being BS. I tried it yesterday after posting that skeptical comment because I couldn't get through to the IRS about a business ID issue that's been holding up my filing. The service actually worked exactly as described. I got a call back within about 30 minutes saying they had an IRS agent on the line. The agent was able to resolve my EIN verification issue that I'd been trying to handle for weeks. While they couldn't give specific tax planning advice about my entity structure (as expected), they did point me to the exact publications and forms I needed. For the OP's question, look at Publication 542 and specifically the sections on related entities and reasonable compensation.

I've been using this exact structure (C-Corp + S-Corp) for 3 years now in my manufacturing business. Here's my experience: The key is making sure the consulting agreement is DETAILED and the S-Corp is providing real, documentable services. I have my S-Corp handle all executive management, marketing strategy, financial oversight, and business development. We keep detailed logs of hours, projects, and deliverables. The IRS did question this in a correspondence audit last year. What saved me was having: 1) A third-party compensation study showing my consulting rates were reasonable 2) Detailed work documentation and deliverables 3) Separate physical locations, email systems, and business operations Also important: Don't have the EXACT same ownership percentages in both entities. Mine are slightly different (I have a minority partner in the C-Corp but not the S-Corp).

Has anyone considered the state tax implications of this setup? I did something similar and while it worked fine for federal, my state (CA) has additional rules about related entities that nearly negated all the benefits.