8955 / How is a C corporation taxed?

Editor’s Note: The 2017 tax reform legislation permanently reduced the corporate tax rate from 35 percent to 21 percent.¹ The final version of tax reform did not provide a special tax rate for personal service corporations. The legislation also reduced the 80 percent dividends received deduction to 65 percent (for corporations that own at least 20 percent of the stock of another corporation) and reduced the otherwise applicable 70 percent dividends received deduction to 50 percent.² These provisions apply for tax years beginning after December 31, 2017.Unlike in the partnership context, a corporation is required to file a tax return and pay taxes at the entity level. The owners of the corporation (its shareholders) also pay taxes at the individual level based on any distributions received as dividend income based on stock ownership.

Prior to tax reform, a corporation paid tax according to a graduated rate schedule, which resulted in a lower tax rate for corporations with relatively modest earnings. The corporate tax rates ranged from 15 percent to 35 percent prior to 2018. The first $50,000 of a corporation’s earnings was taxed at the 15 percent rate, but the next $25,000 of earnings was taxed at 25 percent. Earnings above $75,000, but below $10,000,000, were subject to a 34 percent rate. A 35 percent rate applied to corporate earnings above the $10,000,000 level.³ Under the 2017 tax reform legislation, the maximum tax rate applicable to corporations is 21 percent rate.

Taxable income is computed for a corporation in much the same way as for an individual. Generally, a corporation may take the same deductions as an individual, except those of a personal nature (such as deductions for medical expenses and the personal exemptions (prior to their suspension from 2018-2025)). A corporation also does not receive a standard deduction.