How C-Corps Are Taxed
C-Corps pay taxes at the corporate level first. After that, individual shareholders pay taxes on any dividends distributed by the corporation. This creates the potential for double taxation—once at the corporate level and again at the shareholder level.
The prospect of double taxation may sound daunting, but it can sometimes be avoided or minimized.
Here’s how it works:
- A C-Corp does not pay taxes on every dollar it earns. It deducts operating expenses from revenues to calculate taxable income. For example, if a company earns $100,000 in revenue during a fiscal year but spends $65,000 on operating expenses, its taxable income is $35,000.
- Shareholders in a C-Corp are only taxed on dividends they actually receive. If the corporation chooses to retain its earnings instead of distributing dividends, those retained profits are taxed only at the corporate level, and double taxation is avoided.
In short, double taxation occurs only if a C-Corp makes a profit and distributes dividends to shareholders.
Required Tax Filings
All C-Corps are required to file IRS Form 1120 ("U.S. Corporation Income Tax Return"), which reports the corporation’s income, gains, losses, deductions, credits, and total tax liability.
Final Thougts
If you’re considering forming a C-Corporation or comparing it with other business structures, it can be helpful to read our article about how S-Corps are taxed or the differences between S-Corps and C-Corps.
Please note: This page offers general legal information, not but not legal advice tailored for your specific legal situation. Rocket Lawyer Incorporated isn't a law firm or a substitute for one. For further information on this topic, you can Ask a Legal Pro.
