Taxation and Liability of a C-Corporation
Unlike an LLC or an S-Corporation taxes, a C-Corp is taxed as its own entity and is subject to income tax, at the below tax rate by the IRS:
$0 – $50,000 15%
$50,001 – $75,000 25%
$75,001 – $100,000 34%
$100,001 – $335,000 39%
$335,001 – $10,000,000 34%
$10,000,001 – $15,000,000 35%
$15,000,001 – $18,333,333 38%
Over $18,333,333 35%
C-Corporations are subject to Double Taxation of Profits: the C-Corp itself is taxed, at the above rate, and then the distributions of earning (dividends) made from the C-Corp to the Shareholders is taxed on the shareholders’ personal tax return.
But, owners of a C-Corp can avoid the double taxation by paying themselves a salary OR year-end bonus that will leave the C-corp at earning $0 in income.
If you take a salary from the C-corp, but not the total amount of profit that would bring income to $0, than both the Corp and the individual will be taxed, but it could be at a lower tax bracket, saving on taxes, rather than taking the full salary. This is known as Income Splitting.
- Leaving $250,000 or less in the Corporations bank account as earnings (not distributed to owners) is considered reasonable business needs income. If you leave more than $250,000, the amount over the $250,000 is subject to an Accumulated Earnings Tax of 20%.
Since C-Corps are NOTpPass through entities, profits and losses are not passed through to the shareholders individual tax return in a C-Corp, like they are in an Partnership, LLC, or S-corp. If a C-corp incurs a loss (cost is greater than earnings), the loss can be used to offset income taxes to the corporation that it paid in the last 2 years, or will pay in up to 20 years in the future.
Form 1120: Form 1120 is the form used for a C-Corporation’s annual tax return.