June 12, 2025

How C Corporations Are Taxed

For business owners weighing options, the way a business is taxed can shape nearly every decision that follows. The C corporation stands apart from other structures in that it pays taxes as a separate legal entity. That single distinction affects everything from how profits are handled to how much flexibility the business has in managing earnings and benefits.

C corporations are often associated with large public companies. But many privately owned businesses use this structure too. In recent years, around 2.5 million companies filed as C corporations. Some were startups. Others were well-established operations looking for a model that supports growth, long-term planning, or outside investment. Understanding how a C corporation is taxed is an important step in determining whether it fits the goals of a business. To help clients, prospects, and others, Wilson Lewis has provided a summary of the key details below.

What Is a C Corporation?

A C corp is a legal structure that separates the business from its owners. It can enter contracts, borrow money, and hold property in the name of the business. Ownership is held through shares of stock, and shareholders are not personally liable for the company’s debts or legal obligations.

This structure comes with a set of formal requirements. The business needs to adopt bylaws, hold annual meetings, and maintain a board of directors. These responsibilities may take extra time and planning but can help establish consistency and clarity as the company grows.

Compared to S corporations or LLCs, a C corporation offers more flexibility in how ownership is structured. There is no limit to the number of shareholders, and the company can issue more than one class of stock. That flexibility can be helpful when a business is raising capital or bringing in new partners.

How C Corporations Are Taxed

C corporations report income and pay taxes at the corporate level. The business files a tax return using IRS Form 1120. The current federal rate is 21%. Most states also impose a corporate income tax, though the rules vary.

Unlike pass-through entities, where profits flow directly to the owners, C corps pay taxes on income first. If those profits are later distributed to shareholders as dividends, the shareholders pay tax again. This is known as double taxation. Qualified dividends are taxed at long-term capital gains rates. Other dividends are taxed as ordinary income.

This setup is not ideal for every business, especially if the plan is to take all profits out each year. But it creates room for other strategies. One example is retained earnings. A C corporation can keep profits in the business and use them to fund operations or invest in growth. That gives owners more control over how and when profits are used. 

If retained earnings exceed $250,000, the business may face an accumulated earnings tax unless it can show a clear reason for holding the funds. Valid reasons might include building out a new location, investing in research, or setting aside money for a downturn.

C corporations can also deduct ordinary expenses like wages, rent, and materials. Employee benefits such as health insurance and retirement contributions are generally deductible too. In many cases, these benefits are not considered taxable income for the employee.

Tax Planning Opportunities 

C corporations offer several tax options that other entities do not. Some are especially helpful for businesses that reinvest profits or work across multiple states or countries.

• Net operating losses can be carried forward to offset taxable income in future years. There is a limit to how much can be used each year, but the carryforward period is unlimited for C corps under current law. 
• Capital losses can offset capital gains but not ordinary income. Losses that are not used in one year can be carried forward. This becomes more valuable in years when investment income varies.
• Salaries and bonuses paid to employees are deductible. That includes compensation for owner-employees. This can open up options when deciding how to allocate income between wages and dividends.
• Fringe benefits such as health coverage and group life insurance are generally deductible for businesses. If structured correctly, these benefits are not taxable to the employee. Retirement plans are also deductible and may help attract and retain talent.
• Charitable contributions are another area where C corporations benefit. These are deductible at the corporate level, something not available to pass-through structures. The deduction is subject to limits based on income, but it allows the business to support charitable goals while reducing taxable income.
• Export-related income may qualify for a deduction under the rules for foreign-derived intangible income, often referred to as FDII. This applies to domestic C corporations earning income from foreign use of intellectual property.
• GILTI, or global intangible low-taxed income, applies to U.S. companies with foreign subsidiaries. While complex, it provides a way to handle international income under current tax rules.
• Other business credits include incentives for innovation, such as the research and development credit. This can be particularly helpful for companies investing in new products, technologies, or processes.

When a C Corporation Might Make Sense

For businesses planning to grow, reinvest, or attract outside capital, a C corporation can be a strong option. It supports a wide range of ownership types and planning strategies that can evolve over time.

Business owners who intend to reinvest earnings for several years before selling the company may find the C corporation model especially useful. If the plan is to build long-term value and eventually cash out, holding the business for five years or more can allow time for that investment to pay off. The ability to retain profits and defers distribution gives the business more room to grow before any gains are realized.

There are also cases where a C corporation may not be the best fit. If the goal is to distribute most of the profits each year, a pass-through structure may result in a lower overall tax bill. Some businesses also prefer the simplicity of an LLC or S corporation, especially in the early stages.

Contact Us

Understanding how C corporations are taxed helps business owners make informed decisions about structure. While double taxation and compliance requirements are important considerations, the C corporation model can offer real advantages in the right situations. If you have questions about the information outlined above or need assistance with another tax or accounting issue, Wilson Lewis can help. For additional information call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.