How are C-Corporations Taxed?

By Greg Lindberg, 1800Accountant.com Writer

Do you have plans to launch a brand new small business? Are you ready to take the dive toward a profitable and rewarding future? If you intend to become a newly crowned business owner, it is vital to ensure you know what types of business structure options exist so that you choose the one that is most appropriate for you. This includes understanding how each type of business entity is taxed. One option is to go with a C corporation, which is considered the most traditional type of business structure.

When it comes to filing federal taxes, the IRS treats C corporations as separate business entities. A C corporation can be created when there is an exchange of money or property among prospective shareholders who make up a business. This is done for the capital stock of the business. The advantage of a C corporation is that it typically can claim more tax deductions than the ones available to sole proprietorships or partnerships when calculating their amounts of taxable income. Tax deductions can lead to big savings, helping small business owners hold on to more of the income their companies bring in.

On the tax front, the profits that a C corporation generates are taxed at the corporate level. This income is then taxed to the shareholders of the business when these earnings are distributed among them as dividends. These two taxation methods create what is referred to as double taxation. Because of this complication where money is essentially being taxed twice, a C corporation cannot claim a deduction when it disburses these dividends to its shareholders. As a consequence, the shareholders in this type of corporation cannot deduct any losses that the company may incur, either.

There are a number of tax liabilities that businesses are on the hook for, unlike the fairly simple tax structure of an individual taxpayer who may hold a W-2 position. These tax obligations are different based on the different types of business structures. C corporations often owe income taxes, estimated taxes, employment taxes, and excise taxes. Fortunately, there are many opportunities for corporations to claim deductions, exemptions, and credits to reduce how much they pay in taxes each year.

As the IRS offers more convenient filing options through technology, C corporations with assets at or above $10 million and that file 250 or more annual returns are required to electronically file their taxes. C corporations may need to file Form 1120 or Form 1120S with the IRS.

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