If your business is structured as a C corporation, profits kept in the business are taxed at a rate of 21%.
Commonly referred to as C corp, C subchapter and C corporation business.
Do I Qualify for a C Corporation?
In a C corporation, the company’s earnings are taxed at the corporate tax rate, rather than at the business owner’s individual tax rate.
2022 C Corporation Details
In a C corporation, the company’s earnings are taxed at the corporate tax rate, rather than at the business owner’s individual rate. Profits may be retained within the corporation, which allows the business’s total income to be taxed at the lower C corporation rate. When the business owner decides to take out profits from the company (usually in the form of dividends), they will be taxed on those dividends in addition to the income taxes on the earnings at the C corporation level, known as double taxation.
When does a C corporation work best?
A C corporation structure may be more beneficial for a business where substantial profits are reinvested into the business rather than being distributed to the owners. Under the Tax Cuts and Jobs Act (TCJA), the corporate income tax rate is a flat 21%, whereas individual tax rates on pass-through income are likely to be much higher.
Operating as a C corporation can be an effective way to provide valuable fringe benefits to the company’s employees and shareholders.
A C corporation is a separate legal entity from the owner(s) that provides personal liability protection to shareholders for the debts of the business. However, as a separate entity, an additional income tax return must be filed. There are also additional paperwork requirements for C corporations, such as preparing the Articles of Incorporation and recording meeting minutes.
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• Additional liability protection on the company.
• Eligible for a lower tax rate.
• Ability to defer dividends and taxes on those dividends for future years.
• Subject to double taxation on the dividends.
• A reasonable compensation analysis is recommended to support the calculation.
• Must file an additional 1120 tax return.
• If electing from an S corp, the entity will not be able to re-elect S corporation status for five years.
Assumptions When Taking the C Corporation
• The business owner’s wages are the same as the reasonable compensation if currently operating as an S corp.
• Dividends will be taxed at the highest capital gains rate.
• None noted.
Requirements to Claim the C Corporation
• The business has not elected to be taxed as an S corporation or partnership.
Business Entities That Can Claim the C Corporation
• Schedule C
• S Corporation
• C Corporation
The material discussed on this page is meant for general illustration and/or informational purposes only and is not to be construed as investment, tax, or legal advice. You must exercise your own independent professional judgment, recognizing that advice should not be based on unreasonable factual or legal assumptions or unreasonably rely upon representations of the client or others. Further, any advice you provide in connection with tax return preparation must comply in full with the requirements of IRS Circular 230.