How C Corporations Are Taxed By The IRS

By Brendon Pack, Vice President at 1-800Accountant

Are you planning on opening the doors to your very own small business? Does the idea of self-employment make you eager for a more flexible and fulfilling life? If so, it’s critical to know about the various types of business structures from which you can choose when formally registering a company with your state. You should also closely examine how the IRS treats each business entity structure in terms of tax requirements. Jumping into a business is one of the biggest decisions you’ll make, and choosing the appropriate business type and tax structure is right up there on the priority list as well.

One business entity type you may choose to go with is the C corporation, commonly abbreviated as C corp. This type of business entity has the structure of a basic corporation. When filing your federal income taxes with Uncle Sam, the IRS classifies a C corp as a totally separate entity that an individual owns. In simple terms, a C corp can be formed when money or property is exchanged among prospective shareholders in a specific business. The reason this is done is for the capital stock of a corporation. A big advantage to operating a C corporation is that it will let you enjoy more tax deductions and other tax-saving opportunities compared to those available to sole proprietors when calculating their taxable income. Deductions are always a nice financial perk because it means more money is kept in the business owner’s bank account since a deduction reduces your total taxable income.

As far as how taxation of a C corp works, the profits that the business entity generates are taxed directly to the corporation itself. As a result, the profits are then taxed to the shareholders of the company when these earnings are distributed as dividends. This creates what is known as double taxation. Due to this complication, a C corp cannot claim a tax deduction when distributing dividends to its shareholders. The shareholders are also unable to deduct any losses that the company incurs.

 

Unlike personal taxes that are due every April, there are numerous taxes that businesses are on the hook for with the IRS. These tax obligations vary depending on the type of business structure at-hand. C corps must generally pay income taxes, employment taxes, estimated taxes, and excise taxes. With the IRS opening up more filing options in recent years, C corps that have assets equal to or over $10 million must file their taxes electronically. C corp owners should use Form 1120 when filing with the IRS.

If you have the desire to register your own C corporation, you’ll be able to enjoy many of the tax benefits that the big companies out there can claim. But C corps may not be the best option for you, so be sure you thoroughly research each business structure and select the one most appropriate for your entrepreneurial endeavors.