C-Corporations Income, Deductions

A corporate tax is a tax on the profits of a corporation. The taxes are paid on a company’s taxable income, which includes revenue minus cost of goods sold (COGS), general and administrative (G&A) expenses, selling and marketing, research and development, depreciation, and other operating costs.

Corporate tax rates vary widely by country, with some countries considered to be tax havens due to their low rates. Corporate taxes can be lowered by various deductions, government subsidies, and tax loopholes, and so the effective corporate tax rate, the rate a corporation actually pays, is usually lower than the statutory rate; the stated rate before any deductions.

C corps are subject to double taxation, which means the company will pay taxes on its profits and if some or all of those profits are distributed as a dividend to the shareholders, the shareholders will pay taxes on those dividend payments.

The company pays corporate income taxes on its taxable profit, which is what’s left after subtracting the business’s costs and expenses from its revenue. The federal corporate tax rate is currently a flat 21 percent.

Shareholders pay capital gains tax  on dividends distributed to them throughout the year per the discretion of the board of directors.

At tax time, C corps complete the following two forms:

• IRS Form 1120: U.S. Corporation Income Tax Return is used to report the C corp’s gross income, tax deductions, and taxable profit.
• Form 1099-DIV is provided to each shareholder, reporting the amount of profit that was distributed to them.

There are two types of dividends: qualified and nonqualified.

Nonqualified dividends are dividend payments that don’t meet the qualified dividends requirements and don’t receive special tax treatment. There are some types of dividend payments that are automatically nonqualified including:

• Capital gains distributions
• Dividends on bank deposits
• Dividends from an Employee Stock Ownership Plan
• Dividends paid from a tax-exempt organization, master limited partnership, or real estate investment trusts

Qualified dividends have a lower tax rate but need to meet several requirements.

First, they must be paid out to shareholders from a US corporation or qualifying foreign corporation.

Second, a shareholder must hold the stock for at least 60 days out of a 121-day “holding period,” which begins 60 days before the “ex-dividend date.” If you’re a shareholder, you’ll need to own the stock by this date to receive a dividend payment.

Luckily, shareholders don’t need to worry about figuring out if a dividend is qualified or nonqualified. Form 1099-DIV will list the amount and type of dividend payment.

LLC vs. C corp: Tax the owner pays