C Corporation Tax Basics

The Federal Corporate Tax Rate Is a Flat 21%

Since the Tax Cuts and Jobs Act took effect, a C corporation's federal income tax is a flat 21% of its taxable income, according to the IRS. This replaced the older graduated rate schedule that topped out at 35%, and the flat rate applies regardless of how much or how little the corporation earns, with no bracket to climb.

Form 1120 Is the Core Filing

A C corporation reports its income, gains, losses, deductions, and credits, and calculates its tax liability, on Form 1120, U.S. Corporation Income Tax Return. The IRS states that domestic corporations use this form whether or not they have taxable income for the year; a corporation with no income or that's inactive for the full year generally still has to file. The return is due the 15th day of the fourth month after the end of the corporation's tax year, the 15th of April for a calendar-year filer, unless extended.

Double Taxation, Explained

A C corporation is its own taxpayer, separate from its shareholders. The corporation pays tax on its profit at the 21% federal rate, and if it distributes any of that after-tax profit to shareholders as a dividend, the shareholders report and pay tax on that dividend on their own individual returns. The corporation doesn't get a deduction for dividends paid, so the same dollar of profit is effectively taxed at the corporate level and again at the shareholder level. This is the core tradeoff that leads many closely held businesses to consider an S corporation election, discussed in our guide to S corporation shareholder limits, instead of remaining a C corporation.

Retaining Profit Instead of Distributing It

A C corporation isn't required to distribute its profit as dividends. Profit it keeps and reinvests in the business, called retained earnings, avoids the second layer of shareholder-level tax until it's eventually distributed. But the IRS can apply an accumulated earnings tax if a corporation retains profit beyond the reasonable needs of the business specifically to help shareholders avoid the tax on dividends; see our guide on retained earnings in a C corporation for the specific thresholds.

Estimated Tax Payments

A C corporation that expects to owe $500 or more in tax for the year generally has to pay estimated tax in quarterly installments throughout the year, using Form 1120-W to figure the estimate, rather than paying the full amount when the return is filed. Underpaying the required estimated installments can trigger a penalty even if the full tax is eventually paid with the return.

Deductions a C Corporation Can Take

A C corporation calculates its taxable income by subtracting ordinary and necessary business deductions from its gross income, including employee salaries and benefits, rent, interest, depreciation, and most state and local business taxes. A C corporation can also deduct the cost of employee health insurance and certain retirement plan contributions in full, a deduction that isn't always available to the same extent to a pass-through business owner.

State Corporate Taxes Add to the Federal Bill

Most states layer their own corporate income tax, franchise tax, or both on top of the federal 21% rate, and the rules vary widely. California charges a flat 8.84% corporate tax rate plus an $800 minimum franchise tax, per the California Franchise Tax Board, while Texas has no corporate income tax but applies a franchise tax based on gross receipts above a no-tax-due threshold, per the Texas Comptroller. Check your specific state's tax agency for its current corporate tax rate and any minimum tax before you estimate your total liability.

Net Operating Losses

A C corporation that loses money in a given year can generally carry that net operating loss forward to offset taxable income in future years, though current law limits the carryforward to 80% of taxable income in the year it's used and no longer allows it to be carried back to prior years in most cases. This is a technical area where the specific rules matter, so get a tax professional's help applying a loss carryforward correctly.

Payroll Taxes Are Separate From Income Tax

If your C corporation has employees, including owner-employees who work in the business, it also withholds and pays federal payroll taxes (Social Security, Medicare, and federal unemployment tax) on top of its income tax. These are reported on different forms, Form 941 and Form 940, on a different schedule than Form 1120.

Reasonable Salary Matters for Owner-Employees

An owner who also works for the C corporation as an employee should be paid a reasonable salary for the work performed, subject to payroll tax, rather than taking all compensation as dividends to avoid payroll tax. The IRS pays attention to compensation that looks artificially low relative to the work performed.

Plan for State Differences Before You Pick a State

Because state corporate tax rates, minimum taxes, and franchise tax structures differ so much, from no corporate income tax in a few states to a flat rate plus a minimum tax in others, the state where you incorporate and the states where you do business both affect your total tax bill. Factor this in before assuming your home state's rules, or another state's reputation, apply to your situation.

This Is Not Tax Advice

Corporate tax law involves significant complexity around deductions, loss carryforwards, accumulated earnings, and multistate apportionment that a general overview can't fully cover. Talk to a tax professional about your corporation's specific situation before filing, especially in its first year.