C-Corp taxation is a common IRS tax classification usually most appropriate for medium- and large-sized businesses. Business corporations choose between S-Corp and C-Corp taxation. LLCs choose between pass-through, S-Corp, and C-Corp taxation.
C-Corp taxation has the following features:
- Double Taxation
- S-Corp tax election avoid the double taxation of traditional C-Corps. C-Corps pay corporate taxes on their profits, then owners pay personal income taxes on their distributions.
- Income Splitting
- Small corporations can save on income taxes by comparing corporate and income tax rates and then optimizing the amount of corporate income paid in salaries and retained in the corporation. This works because the corporate tax rate on the first $75,000 of income is 25%, which is often lower than the owners’ personal income tax rates.
- Deduct Benefits
- C-Corps are allowed to deduct qualified employee fringe benefits such as health and insurance benefits, education assistance, stock options or company discounts, transportation (e.g. company-owned car), moving and housing benefits, retirement plans, fitness club memberships, and meals during work hours. Consult your accountant or tax professional for allowable deductions specific to your situation.
- 100+ Owners
- Businesses with over 100 shareholders do not have the option of electing S-Corp taxation but may elect C-Corp taxation.
- Nonresident Aliens
- Businesses with even a single shareholder (including a business) that is not a US citizen or resident may not elect S-Corp taxation but may elect C-Corp taxation.
Electing C-Corp Tax Treatment
Upon incorporation, a legal corporate entity is taxed as a C-Corp by default. If it elects S-Corp tax
treatment and later decides to convert to C-Corp tax treatment, it may do so by filing Form 8832
Entity Classification Election with the IRS.
Upon formation, LLCs will be taxed as either a sole proprietorship (disregarded entity) or a partnership, depending on the number of members. The LLC may elect C-Corp tax treatment by filing Form 8832 Entity Classification Election with the IRS.