C Corporations and Taxes


A corporation is a separate legal entity. So, it should come as no surprise that it will also be taxed that way.

This is one area where C Corporations really shine as business structures. The IRS, in its effort to encourage business growth, has an entirely separate set of tax brackets for businesses, and those brackets are lower than the personal tax brackets! For example, a C Corporation is only taxed at the rate of 15 percent on its first $50,000 of net income. When you earn $50,000, on the other hand, you’ll pay more than 15 percent.

The IRS also allows C Corporations to set their own financial year-ends. They are not bound by the December 31st year-end that you are, or that the flow-through-tax business structures (S Corporations, Limited Liability Companies (LLCs) and Limited Partnerships (LPs)) are.

A C Corporation prepares its own tax return. In the United States, this is called a Form 1120, and it is filed with the IRS. Depending on the state where the C Corporation was formed, it may also have to file a state-level income tax return. But unlike the flow-through-tax business structures, a C Corporation doesn’t have to provide its shareholders with any tax forms or reports, unless the C Corporation is distributing profits to its shareholders.

That’s because, unlike these flow-through businesses, a C Corporation isn’t required to distribute its profits to the shareholders each year. A C Corporation can choose to hang onto its profits for several reasons – business expansion, debt pay-down, etc., and that’s perfectly okay. In fact, a C Corporation can hold back up to $250,000 in accumulated net profits without any tax consequences. More can be retained as long as the C Corporation can prove that those profits are intended to be reinvested into the business. These “retained earnings” are another great advantage C Corporations have over other business structures.

There are many variables when you’re structuring a business. That’s why it’s hard to go through a quick-service website. Unless you talk to someone who’s got some knowledge and experience on both the tax and the legal side, it’s hard to know what you don’t know. And that can leave you vulnerable.

Got questions? Contact us! We’re here for you.

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