Federal C Corp Tax Rates: Everything You Need to Know
Federal C corp tax rates are pretty straightforward as C corporations are treated as separate entities in the eyes of the IRS. 4 min read
2. Pros and Cons
3. Accumulated Earnings Tax
4. Be Cautious When Interacting With Your Corporation
Federal C corp tax rates are pretty straightforward as C corporations are treated as separate entities in the eyes of the IRS. They are responsible for claiming income and losses, paying taxes, and ultimately distributing profits to shareholders. C corporations have double taxation to contend with — the company's profits are taxed when earned, then the shareholders are taxed when the earnings are received as dividends.
In some instances, the net income could be higher even after the double tax, versus what it would be for individuals or sole proprietors in the top tax brackets. You should plan ahead by getting an estimate of your personal and business incomes and dividends, then calculate the respective tax rates.
C Corporation Taxes
Some people note the U.S. corporate tax rate is 35 percent but in reality, the rate is between 15 percent to 35 percent. It varies based on the amount of company income that is subject to taxes for that year. To calculate the corporate tax rate, start by figuring out what your taxable income is. Have a tax preparer calculate it or look at your prior year's taxable income to get a starting point for your taxable income.
The federal income tax rate as of 2017 is:
- $0 - $50,000: 15%
- $50,000 - $75,000: 25%
- $100,000 - $335,000: 39% (which is the 34% rate and 5% surcharge)
- $335,000 - $10,000,000: 34%
- $10,000,000 - $15,000,000: 35%
- $15,000,000 to $18,333,3333.33: 38% (which is the 35% basis rate and 3% surcharge)
- Greater than $18,333,333.33: 35%
Corporations that spend 95 percent of their time in certain fields are taxed at a flat rate of 35 percent:
- Actuarial Science
- Performing Arts
Corporate income thresholds don't change due to inflation, they only fluctuate when Congress passes new corporate tax legislation. With proper planning, you can reduce the effect of double taxation, while also leveraging other benefits afforded to corporations.
Top individual tax rates are higher than top corporate rates, and C corporations can retain earnings rather than passing through the entire amount, so a regular corporation might wind up being the most tax-advantageous choice in some scenarios.
If a corporation has too many tax preference items it may be subject to AMT, or Alternative Minimum Tax. In general, the rate is 20 percent for AMT, but may be reduced to 15 percent for certain items.
Pros and Cons
Small businesses are concerned about incorporation because of double taxation issues. Businesses shouldn't assume it's a deal-killer until they do all the research. It's important to note that not all corporate profits are double-taxed. You can withdraw reasonable salaries, which are deducted from the profits. This eliminates the corporate level taxation on the salaries.
There are some instances where the net profit is offset by owners' salaries, so no corporate taxes are due. If a C corp pays shareholder dividends, the payments are taxed at the corporate level. Individual shareholders don't pay self-employment taxes. Qualifying dividends are taxed at the rates for capital gains and not an individual's top marginal rate.
Be mindful that if your corporation is profitable but you aren't paying dividends for a good length of time, the IRS may decide some of the salaries owners received were disguised dividends. This means the IRS may remove some of your salary deductions which results in a hefty tax bill, complete with interest and penalties. From an IRS standpoint, it's best that corporations do not pay salaries that are notably different than industry standards, and you should pay out some dividends every year.
Accumulated Earnings Tax
There is an accumulated earnings tax designed to bar corporations from keeping earnings on reserve rather than distributing them to shareholders as dividends, thereby skirting tax responsibility. Most corporations are allowed to hold up to $250,000 in retained earnings before they are subject to the accumulated earnings tax. As long as the money is linked to a demonstrated business need, it won't be subject to the tax either.
Be Cautious When Interacting With Your Corporation
Take note that any transactions occurring between stockholder owners and a closely held corporation are likely to be scrutinized by the IRS. If there is any corporate property that gets re-directed to its stockholders, it's considered a preferential or constructive dividend. This is not a great taxation option as the dividend is taxed on the owners and not deductible in the business. An example of preferential dividends involves personal expense payments on behalf of stockholders.
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