C Corp Tax Filing: Everything You Need to Know
C corp tax filing requires various procedures depending on how much your business makes. When registering a corporation, the business is designated as a C corp under federal income tax guidelines. 3 min read
2. S Corp Requirements
3. C Corporation Basics
4. Pros and Cons
5. Service Tax Rates
C corp tax filing requires various procedures depending on how much your business makes. When registering a corporation, the business is designated as a C corp under federal income tax guidelines. The differences between an S and C corp are strictly relegated to the way the IRS taxes both entities. When it comes to asset protection measures, both entities are the same, including other compliance mandates.
A solid business owner should determine the tax repercussions upon deciding how to structure a corporation. In addition, it’s not wise to choose a business structure solely on tax grounds, but it is equally unwise to ignore the tax implications based on your choice.
When it comes to non-tax matters, corporations provide the following benefits:
- Easier to raise capital
- Easier to reorganize or recapitalize as the business grows
- Enhanced latitude when planning succession
Corporate registration allows owners to implement tax plans that wouldn’t be available in other entities, such as the accumulation of income within the business, or giving income to shareholders through distributions and salaries.
C Corp Disadvantages
With that, disadvantages come in the form of:
- Double Taxation: Owners must pay business taxes on the profits, and shareholders must pay separate taxes upon filing their personal tax returns.
- Taxed Wages: Wages paid to shareholders are taxed when he or she files an individual tax return.
Small businesses can dodge paying double taxes through an S corporation tax structure. S corps do not pay corporate taxes, and the profits and losses of the businesses pass from the business to individual shareholders. Shareholders then file such profits and losses on their tax returns and pay taxes based on his or her share in the business.
S Corp Requirements
To gain S corp eligibility, you must meet the following mandates:
- Your corporation cannot have over 100 shareholders
- The business may not have multiple stock classes (No tiered stock allowed)
- Your business must be a domestic corporation
- Nonresidents and business entities cannot own your corporation
C Corporation Basics
A corporation forms a separate entity from the owners, or shareholders, when it comes to income taxation. As a distinct entity, the shareholders do not pay taxes on behalf of the business. Corporate tax rates on profits could be lower than individual income taxation, which gives C corps certain tax advantages. The corporation would pay income taxes on Form 1120. In addition, corporate taxes are paid at the corporate income tax rate, not the personal one.
Pros and Cons
Because of the two tax levels, a standard corporation could be less desirable among many owners than other entities that offer pass-through taxation, where profits and losses would go straight to shareholders. The following entities offer pass-through taxation:
- Sole proprietorships
- S corps
A solid tax strategy can reduce double taxation impacts, while still using a corporate structure to gain access to other positives. Since individual tax rates tend to be higher than corporate rates, a C corp may retain more earnings instead of passing the amount to shareholders. In such a case, a C corp would be the best option.
Corporate business taxes can get complicated, and you must complete various documents and adhere to multiple schedules to remain compliant. However, you can use tax software companies to help you in tax matters, and accountants can detail the ramifications of S or C corp taxation. Also, accountants can provide guidance on maximizing deductions and preparing returns.
Service Tax Rates
Corporations are taxed based on profession. For example, the following service corporations will pay a flat fee of 35 percent of net profits:
Service corporations comprise of businesses whose employees a 95-percent minimum amount of time in the aforementioned fields.
Note: Form 1120 needs to be completed by the 15th of the third month after your corporation’s end tax year. For instance, if your company has a December 31 year-end tax time, you need to file a tax report by March 31.
If you need to learn more about C corp tax filing, post your legal need to our UpCounsel marketplace. UpCounsel’s lawyers have graduated from some of the best law schools in the county and will help you through the C corp filing process from beginning to end. In addition, they will give you the best advice on how to properly manage and structure your corporation so you can focus on expanding your business aspirations.