A few large corporations have gotten a lot of press lately over claims saying they pay almost nothing in taxes. News reports have initiated public anger because of the perception that companies make enormous profits but pay little to no taxes. It’s sometimes easy to target corporations as the bad guy, especially when there are concerns that large business smother small businesses’ ability to survive. However, the reality is that corporations have complicated tax structures that can be hard to understand.
Corporate taxes include two types: S-corp taxes and C-corp taxes. In this article, we provide some helpful information about filing C-corp taxes.
Understanding a C Corporation
A C corporation, or C-corp, is a type of corporate business entity. The other alternative is to file as an S corporation.
C-corps are the most common type of corporation organized by companies in the United States. Most businesses prefer the C-corp structure because it allows them to distribute preferred and common shares to investors. There are also apportioned rights for earning distributions, and C-corps can organize boards that make decisions on everything from spending to strategy.
Legally, a C-corp is “a separate legal entity created by a state filing.” The C corporation, also known as the “regular” corporation, is subject to corporate income tax. So, income earned by the business is taxed at the corporate level of the business. Profits are then distributed to the owners.
Owners must also file taxes on earnings from the C-corp on their personal returns. This is commonly referred to as double taxation. It basically means that corporations have to pay business taxes twice, compared to sole proprietorships and business partnerships that only have to pay once on the owners’ personal returns. Meanwhile, an S corporation has “pass-through” income that is not subjected to double taxation.
C-corporations are required to provide a public disclosure of share performance in an annual report. There are also limits on an owner’s financial and tort liability for business losses.
Advantages of a C Corporation
If S corporations are not subject to double taxation and C corporations are, why are C-corps more popular?
The bottom line is C-corps generally have more benefits and protections under state and federal governments, including a lower audit risk. There is also the notion that lenders and suppliers traditionally prefer working with C corporations because there is unlimited growth potential and no limits on shareholders.
Long-term stability is also a factor. A C-corp can continue to exist even after its original owners are no longer part of the company. This means that both owners and shareholders have limited liability for business debts and litigation, so it’s assumed to be a safer bet for investors.
Creating a C Corporation
Most opt for the safety and security of a C corporation despite double taxation. Yes, there are additional compliance requirements from government and more complex tax rules, but the protection C-corps provide is unrivaled.
S Corporations have a lot of limitations that C Corporations don’t have. A good example is that there are no restrictions on the number of shareholders a C-corp can have, while S-Corps are limited to 100 or less.
When weighing the decision of which tax entity to create, businesses first need to decide if they want to file as a C-corp or S-corp. Second, they need to begin filing for business license registrations and other certifications (like operating permits) that meet industry standards and rules. These permits are obtained through state, county and municipal governments.
Additional steps to create a C-corp:
● Obtain an Employer Identification Number (EIN) by filing an IRS Form SS-14.
● Apply for a franchise tax ID number in states where franchise tax payments are required.
● Contact the state tax commission or franchise tax board to learn more details about state tax reporting for corporations.
Additional Steps to Maintain a C-Corp
After a C corporation has been established, it is vital to remain compliant. The government has regulatory committees that make sure corporations follow the rules. Filing the proper taxes is crucial to the successful operation of a C-corp. We recommend doing the following when it comes to tax season:
● Learn more about tax deductions for corporations. Tax deductions are important to corporations and there are a lot to choose from. Corporations can deduct employee salaries and bonuses, health insurance costs, retirement plan contributions and more.
● Pay estimated taxes on time. C corporations are like other business entities that must pay estimated taxes to the IRS. C corporations are required to pay estimated corporate income tax. Those that fail to pay quarterly can be subjected to penalties and interest on owed taxes.
● C Corporations file Form 1120 for federal corporate taxes. Shareholders must also report any dividends they receive from the corporation on their own personal returns.
● C Corporations must also file state tax returns. The corporate tax rate is usually a flat percentage that varies from state to state. Corporations registered in multiple states may have to file multiple state tax returns.
Corporate taxes can be complicated and deserve proper attention to ensure compliance. While C corporations have many advantages over S corporations, double taxation represents a significant cost businesses need to include in projections. In order to guarantee compliance with all the regulatory measures and IRS rules and regulations, get help from a tax professional to make sure your business is as tax efficient as possible.
Visit www.levytaxhelp.com or call 800-TAX-LEVY to learn what Levy & Associates can do for your corporation. We have years of experience dealing with corporate taxes and can ensure you stay in good standing with the IRS.