How Are C Corporations Taxed?

Author: NCH Internal Editorial Team
Reviewed by Cort W. Christie, MBA
Cort W. Christie, MBA is the Founder of Nevada Corporate Headquarters (NCH) and a nationally recognized entrepreneur, executive, author, and speaker. Mr. Christie has spent over 32 years helping business owners structure, protect, and scale their companies.

This article has been reviewed by Mr. Christie to ensure accuracy and value for today’s entrepreneurs. Jump to...

C corporations (C corps) are among the most common types of business entities in the United States. Known for their structure, liability protection, and ability to raise capital, C corporations are taxed in a unique way that distinguishes them from other business types like sole proprietorships, partnerships, and S corporations.

This comprehensive guide will discuss the tax structure of C corporations, explaining how they are taxed at both the federal and state levels, the concept of double taxation, and the various deductions and credits available to lessen tax liability.

What Is a C Corporation?

A C corporation is a legal entity separate from its owners, which provides the owners (also known as shareholders) with limited liability. This means shareholders' personal assets are generally protected from the corporation’s liabilities and debts.

Unlike other business structures, such as sole proprietorships or partnerships, C corporations are distinct because they are taxed separately from their owners. In exchange for this protection, C corporations must follow more formal governance rules than other entities, including holding annual meetings, maintaining detailed records, and filing complex tax returns.

Federal Income Tax on C Corporations

Corporate Tax Rate

C corporations are subject to federal corporate income tax, which is levied on the company’s profits. Prior to the passage of the Tax Cuts and Jobs Act (TCJA) in 2017, corporate income tax rates were progressive, meaning companies with higher incomes were taxed at higher rates. However, the TCJA changed this system by implementing a flat corporate tax rate of 21%.

This means that regardless of a corporation’s income, it will be taxed at 21% on its profits. This flat rate is considered competitive compared to tax rates in other developed countries, making the US a more attractive location for multinational companies.

Taxable Income

Taxable income for a C corporation is calculated by subtracting allowable deductions and credits from gross income. Gross income includes revenue from the sale of goods and services, as well as income from investments, interest, and dividends. Deductions include business expenses such as employee wages, rent, utilities, and interest payments.

C corporations can take advantage of certain tax credits, such as the research and development (R&D) tax credit, to further reduce their tax liability. Once taxable income is determined, the corporation applies the 21% tax rate to calculate its federal income tax obligation.

State Income Tax

Most C corporations are subject to state income taxes. The rates and rules governing state taxes vary widely from state to state. Some states, such as Nevada and Wyoming, do not impose corporate income taxes, while others, such as New Jersey and California, have relatively high corporate tax rates.

Each state has its own method for calculating corporate income taxes. C corporations operating in multiple states may need to apportion their income among the states where they do business, paying taxes in each state according to its laws.

Double Taxation of C Corporations

Double taxation is a unique feature of C corporations. It means that the profits of a C corporation are taxed twice—once at the corporate level and again at the shareholder level. This can significantly impact the overall tax liability of the corporation and its shareholders.

How It Works

• Corporate Level Taxation: The corporation is taxed on its net income at the federal and possibly state levels. After paying taxes, the remaining profits belong to the company and can either be reinvested in the business or distributed to shareholders as dividends.
• Shareholder-Level Taxation: Dividends paid to shareholders are taxable income. Shareholders must report dividend income on their personal tax returns, and these dividends are taxed at a different rate than regular income.

Although dividends are a common way to distribute profits, shareholders may also receive compensation in other forms, such as stock options, which may have different tax implications.

Mitigating Double Taxation

Corporations and shareholders can use certain strategies to mitigate the effects of double taxation. One approach is for the corporation to retain earnings and reinvest them in the business rather than paying them out as dividends. Retained earnings are not subject to shareholder-level taxes until distributed, potentially reducing overall tax liability.

Another method involves offering shareholders salaries and bonuses, which are deductible as business expenses. This reduces the corporation's taxable income while providing compensation to shareholders that is taxed only at the individual level.

Dividends and Capital Gains Taxes

When C corporations distribute profits to shareholders in the form of dividends, the shareholders must report those dividends as income and pay taxes on them. Dividends are typically classified as either "qualified" or "ordinary" for tax purposes.

• Qualified Dividends: These are dividends paid by U.S. corporations (or qualified foreign corporations) and are taxed at the lower long-term capital gains tax rates, which range from 0% to 20%, depending on the shareholder’s income.
• Ordinary Dividends: These dividends don’t meet the criteria for qualified dividends and are taxed at the shareholder’s ordinary income tax rate, which can be as high as 37%.

Apart from dividends, shareholders may also face taxes on capital gains if they sell their shares in the corporation at a profit. Capital gains taxes are generally lower for assets held for more than a year (long-term capital gains), encouraging shareholders to hold onto their investments rather than frequently buying and selling.

Deductions and Credits Available to C Corporations

C corporations can reduce their taxable income through various deductions and credits. Some of the most common deductions and credits include:

• Operating Expenses: C corporations can deduct ordinary and necessary business expenses, such as salaries, rent, utilities, and office supplies.
• Depreciation: The depreciation of business assets (such as equipment, machinery, and buildings) can be deducted over time.
• Charitable Contributions: C corporations can deduct charitable donations up to 10% of their taxable income, subject to certain limitations.
• Research and Development (R&D) Tax Credit: This credit is designed to encourage companies to invest in R&D activities, offering a dollar-for-dollar reduction in tax liability for qualifying expenses.
• Foreign Tax Credits: C corporations that do business internationally may be eligible for a foreign tax credit, which helps offset taxes paid to foreign governments.
• Net Operating Loss (NOL) Carryforwards: If a C corporation has more deductions than income in a given year, it may have a net operating loss. These losses can often be carried forward to future tax years to offset future income.

Alternative Minimum Tax (AMT) for C Corporations

Before the TCJA, C corporations were subject to an alternative minimum tax (AMT) to ensure that corporations with substantial income could not use excessive deductions and credits to avoid paying taxes. The AMT was a separate tax calculation that required corporations to add back certain deductions and credits and pay whichever was higher: the regular tax or the AMT.

However, the TCJA permanently repealed the corporate AMT for tax years beginning after December 31, 2017. This change simplified tax compliance for C corporations, allowing them to focus on maximizing their deductions and credits without worrying about the AMT.

Main Takeaway

The taxation of C corporations involves federal and state income taxes, as well as potential tax liabilities for shareholders in the form of dividend and capital gains taxes. One key challenge for C corporations is managing the effects of double taxation, where corporate profits are taxed at both the corporate and shareholder levels.

However, numerous deductions, credits, and strategies, including the R&D tax credit, foreign tax credits, and net operating loss carryforwards, are available to reduce tax liability.

Reduce Tax Liability

At NCH, we specialize in forming LLCs for businesses that want the flexibility and tax advantages of pass-through taxation while still benefiting from limited liability protection. Whether you're looking to form a C corporation or an LLC, NCH provides expert guidance, ensuring your business is structured in the most tax-efficient and compliant way possible.

Call 1-800-508-1729 to schedule your complimentary consultation today!

DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.

Book Your FREE
1:1 Business Checkup

In only 15-30 minutes, our business formation experts will meet with you and:

• Evaluate your current business structure and identify areas of improvement
• Find potential problems before they become major issues
• Develop a game plan for improving asset protection and minimizing tax liability
• Reduce your exposure in the event of a business accident

Time slots are limited and fill quickly, so secure your spot now!

---

Speak With a Business Expert

Please fill out the necessary information:

Select a Time (PST)* 9:00 AM (PST) 10:00 AM (PST) 11:00 AM (PST) 12:00 PM (PST) 1:00 PM (PST) 2:00 PM (PST) 3:00 PM (PST) 4:00 PM (PST)

Please fill in the required fields!

By submitting this form, you agree to the Terms and Conditions and Privacy Policy, and that my contact information, including email address, may be shared with the sponsor.

Schedule Consultation