C Corp Tax Rates: Everything You Need to Know
Also referred to as a regular corporation, a C corporation is taxed as a distinct entity from its owners and shareholders. 4 min read
What are C Corp Tax Rates?
C corp tax rates can be rather costly due to the double taxation it may occur. While C corporations are taxed on profits earned, they can be taxed again on any distributions made to the shareholders in the form of dividends.
When choosing which type of business structure to operate, tax rates should be kept in mind. While this shouldn’t be the only consideration, it’s important to know the tax implications that each type of business structure will endure.
Difference Between S Corporation and C Corporation
S corporations are pass-through tax entities whereas C corporations are completely separate entities from its owners. When choosing which type of business structure, whether it be an S or C corporation, you’ll want to consider both non-tax as well as tax ramifications. However, keep in mind that the only difference between these two types of corporations is with regard to taxation.
A key difference between businesses that operate as pass-through entities and C corporations is that the owners of C corporations are taxed only on the income received from the corporation. Since a corporation is taxable, the profits leftover after taxed at the corporate level aren’t taxed to the owners. Such profits are only taxed when they are distributed to the shareholders as dividends. However, this would be the case for unincorporated businesses and S corporations.
Also referred to as a regular corporation, a C corporation is taxed as a distinct entity from its owners and shareholders. After the appropriate deductions and credits have been taken into account, the remaining income is the amount taxed on the corporate income tax return. Normal tax rates include certain income-level conditions, in which a corporation is taxed on the level of profits, which varies. The more profits earned, the higher the percentage. However, if a corporation makes over 18.3 million, there is a flat 35 percent applied. Also taxed at 35 percent are personal service corporations or corporations with employees that spend roughly 95 percent of the time in the areas of engineering health, law, accounting, architecture, performing arts, actuarial science, or consulting.
After the profits are taxed using the above chart, any distributions, also referred to as dividends, made to shareholders are taxed again at the shareholder’s tax rates. Therefore, as previously noted, corporations incur double-taxation. The advantage to the corporate income tax rates is that corporations need not worry about inflation, as the tax thresholds only change if corporate tax legislation is passed by Congress.
Another key point to keep in mind is that only income paid as dividends are taxed twice. Income distributed as salary or even deferred compensation is a deduction that the corporation can claim on its income tax return.
Corporation Tax Deductions
To further note the deductions that a corporation can take, all necessary and ordinary business expenses can in fact be deducted. Therefore, any start-up expenses, operating expenses, and advertising campaign expenses can be deducted. Salaries, bonuses, and tuition reimbursement that the corporation pays as well as any and all costs of medical and retirement plans for employees can also be deducted. Even insurance premiums, travel expenses, interest payments, fuel and excise taxes, legal fees, tax fees, and bookkeeping can be deducted. Essentially any expense that the corporation can relate back to the business itself can be deducted.
How to Reduce Corporate Income
Owners of sole proprietorships, partnerships, and LLCs must pay taxes on all business profits on their individual income tax returns, whether or profits are taken out of the business. However, in a corporation, the Internal Revenue Service (IRS) allows corporations to leave profits in the business up to a certain limit, generally $250,000, without incurring additional tax penalties. In some circumstances, salaries to the owners can offset the full net profit of the corporation, so corporate income tax isn’t due.
However, as noted above, a corporation that pays dividends to its shareholders is subject to corporate income tax on such distributions. However, when incurring this tax, the rate at which such dividend payments will be taxed is at the capital gains rate and not the individual’s highest marginal tax rate, which is income-based. Therefore, since the capital gains rate is likely to be much lower, the amount of tax to be owed will be less.
Lastly, the dividends funded to a shareholder who participates actively in the operations of the business is not subject to the 0.9 percent Medicare surtax on earnings or the 3.8 percent tax on net investment income that are usually imposed on those with higher incomes.
While you may choose not to distribute dividends to the shareholders in an effort to save on taxes, the IRS will likely assume, if you are a profitable business, that some or all of the salaries of those owners are actually dividends being disguised as salary, thus resulting in tax penalties. In order to avoid such penalties, you’ll want to ensure that all employees, including those that own the corporation, receive reasonable salaries. While all salaries are considered deferred compensation and thus deducted from corporate income taxes, any unusually high salaries (those that are just so high and raises a red flag) may be looked into by the IRS, in which it could conclude that a portion of the salary is a disguised dividend.
Corporations and Earnings
A major difference between C corporations and businesses that operate as pass-through entities is that the owners of C corporations are only taxed on the income that they receive from the corporation.
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