C Corporation Taxes
A regular corporation (also known as a C corporation) is taxed as a separate entity. Income earned by a corporation is normally taxed at the corporate level using the corporate income tax rates shown in the table below. The corporation must file a Form 1120 each year to report this income.
After the corporate income tax is paid on the business income, any distributions made to stockholders are taxed again at the stockholders' tax rates as dividends. Because of these two levels of tax, a regular corporation may be a less desirable form of business than the other business entities (sole proprietorships, partnerships, limited liability companies, or S corporations). However, recent tax law changes are once again making the corporate structure a far more viable option. Don't automatically dismiss the corporate form of organzation. Consult your tax professional to see if incorporating makes sense for you.
Comparison with partnerships or sole proprietorships. Because the taxation of income to sole proprietorships and partnerships is determined by the tax bracket that applies to each individual owner, a comparison of tax rates that apply to corporations and to individuals can give you some idea of which form of business would save taxes at a particular income level.
The following chart compares the marginal tax rates for tax years beginning in 2012 for corporations, married individuals filing jointly, and for singles. Note that beginning in 2013, the new 39.6 percent individual rate, combined with other tax changes, makes the corporate form of ownership far more attractive.
|Taxable Income ($)||C Corp.||Married/Joint||Individual|
|$0 -- $8,700||15%||10%||10%|
|$8,701 -- $17,400||15%||10%||15%|
|$17,401 -- $35,350||15%||15%||15%|
|$35,351 -- $50,000||15%||15%||25%|
|$50,001 -- $70,700||25%||15%||25%|
|$70,700 -- $75,000||25%||25%||25%|
|$75,001 -- $85,650||34%||25%||25%|
|$85,651 -- $100,000||34%||25%||28%|
|$100,001 -- $142,700||39%||25%||28%|
|$142,701 -- $178,650||39%||28%||28%|
|$178,651 -- $217,450||39%||28%||33%|
|$217,451 -- $335,000||39%||33%||33%|
|$335,001 -- $388,350||34%||33%||33%|
|$388,351 -- $10,000,000||34%||35%||35%|
|$10,000,001 -- $15,000,000||35%||35%||35%|
|$15,000,001 -- $18,333,333||38%||35%||35%|
Note: personal service corporations (those whose employees spend at least 95 percent of their time in the field of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting) are taxed at a flat rate of 35 percent of net profits.
As the table shows, corporations generally have the same or a higher tax rate imposed on their income compared to those subject to individual tax rates. Also keep in mind that the rate comparison is only part of the tax picture to consider: distributions (money taken out) from a partnership are generally taxable only once on the partners' individual returns, while distributions made by a corporation to its shareholders after corporate tax is paid are taxed again as dividends on the shareholder's returns.
Salaries may offset corporate income tax. In comparing the tax advantages of operating as a partnership or sole proprietorship rather than as a corporation, remember that not all of the corporate profits will be subject to double taxation. The operators of the corporation may withdraw reasonable salaries, which are deductible by the corporation. These salaries are therefore free from tax at the corporate level (though the recipients will have to pay income tax, and both recipients and the business will have to pay FICA tax, on them). In some cases, the entire net profit may be offset by salaries to the owners, so that no corporate income tax is due.
Accumulated earnings tax. Because a corporation is a taxable entity that is separate from its stockholders, its excess profits (profits remaining after being taxed at the corporate level) are not, as in the case of unincorporated businesses and S corporations, taxed to the owners when they are earned. The profits are taxed only if and when they are distributed to the stockholders as dividends. However, a corporation may not safely accumulate (retain) its earnings indefinitely. If the accumulations are not related to the reasonable needs of the business, an accumulated earnings tax of 15 percent will apply, in addition to the regular corporate tax. Virtually any corporation can accumulate up to $250,000 in retained earnings without becoming subject to this tax.
Transactions between corporations and owners. Transactions between a closely held corporation and its stockholder -- owners will be closely examined by IRS agents. If corporate property is diverted to the stockholders, they will be considered to have received what is called a "constructive" or "preferential" dividend. This tax treatment is highly unfavorable, since this dividend will be taxable to the owners and will not be deductible to the corporation.
The most common type of preferential dividend received by stockholders involves the payment of personal expenses on behalf of stockholders. Typically, the corporation claims deductions for these expenses as business expenses on its income tax return, but where the expenses are clearly personal expenses, the corporation will be denied a deduction and the officer -- stockholder will be deemed to have received a taxable dividend.
Stockholders are also considered to have received constructive dividends when: (1) corporate property is sold to a stockholder at less than its fair market value, (2) employee -- stockholders are given unreasonably high compensation, (3) the corporation pays excess rents to shareholders for property leased by the corporation, or (4) the corporation loans the shareholder funds and there is no intention to repay the loan.
Corporate Alternative Minimum Tax. Like individuals, corporations can become subject to an Alternative Minimum Tax (AMT) if they have gained the benefit of "too many" tax preference items. The corporate AMT will not apply to any corporation if (1) the corporation is in its first year of existence or (2) the corporation was treated as a small corporation exempt from AMT for all prior tax years after 1997 and its average annual gross receipts for the last three years ending before the 2009 tax year did not exceed $7.5 million ($5 million if it only existed for one prior year). For corporations that are subject to AMT, the general rate is 20 percent (the rate is reduced to 15 percent for certain specific items).