Taxation Of Regular C Corporation

A regular corporation (known as a C corporation because it is taxed under Part C of the Tax Code) is taxed on its income as filed annually on Form 1120.

For federal tax purposes, corporations include any business organized under a federal or state law that identifies the entity as a corporation, joint stock companies, insurance companies, FDIC-insured banks, business entities wholly owned by a state or any political subdivision thereof, and certain foreign business entities. Noncorporate entities, such as sole proprietorships and partnerships, may elect to be taxed as corporations.

Taxation is at the following rates (US$):

Corporate taxes
Income	Tax rate
US$0–50,000	15%
US$50,001–75,000	US$7,500 + 25% of the excess amount
US$75,001–100,000	US$13,750 + 34% of the excess amount
US$100,001–335,000	US$22,250 + 39% of the excess amount
US$335,001–10,000,000	US$113,900 +34% of the excess amount
US$10,000,001–15,000,000	US$3,400,000 + 35% of the excess amount
US$15,000,001–18,330,000	US$5,150,000 + 38% of the excess amount
US$18,330,001 and above	35%

 

Smaller companies may use a simplified income tax return Form 1120-A if they meet the following requirements, among others:

Personal service corporations (those whose employees spend at least 95% of their time in a series of defined professional fields) are taxed at a flat rate of 35% of net profits; Personal Holding Companies may be subject to a 39.6% tax on undistributed PHC income. Members of a controlled group of corporations are taxed on their consolidated income. A C corporation may be subject to a 39.6% accumulated earnings tax on retained earnings above $250,000, if they are not related to the reasonable needs of the business.

A C corporation may also be subject to a 20% alternative minimum tax. The corporate AMT does not apply to any corporation with average gross receipts of less than $5 million for a three-year period. For corporations that are subject to AMT, the rate is 20 percent.

A corporation does not get a tax deduction when it distributes dividends to its shareholders. Any distributions made to stockholders are taxed again at the stockholders' tax rates as dividends. This rule has made the C corporation unattractive for many small businesses, which often prefer to use an "S" corporation, partnership or limited liability company, all of which are 'pass-through' in terms of corporate taxation.

'Corporate earnings & profits' are defined on a different basis from taxable income; distributions to shareholders in excess of corporate E&P are normally not taxable to the corporation, which must file Form 5452, Corporate Report of Nondividend Distributions, whenever nontaxable distributions are made to corporate shareholders.

Corporations can set up their books to show net income based on corporate E&P rather than tax return net income. This allows the accumulation of corporate E&P (for purposes of determining how much is available for dividend distributions) to be recorded in the corporate retained earnings account on the corporation balance sheet. The difference between "book" net income (corporate E&P), and "tax return" net income is reconciled on Schedule M-1, Form 1120.

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