C Corp Filing Requirements: Everything You Need to Know

There are many requirements in filing a federal income tax return for your small business, depending on your business structure. Each type of entity requires a different tax form and filing requirements to report your business income and expenses. This article will bring you an overview of C corporations and C corp filing requirements.

What is a C corporation?

C corporation is a form of business organization in which the owner (or shareholders) are taxed separately from the business. Shareholders are the corporation’s owners, each owning a fraction of the company. A shareholder may own a share of the stock of the corporation. C corporations raise funds by selling these shares.

The C corp entity is taxed on income earned, whereas shareholders are taxed on individual income. A C corporation pays the same tax on its revenue as a person would on their annual salary—a flat 21% on operating earnings. 

Because shareholders in a C corporation are wholly separate from the corporation, income delivered to stockholders of profits or other payments is paid at the shareholders’ rates, leading to “double taxation.”

How are C corps taxed? 

C corps must first pay corporate taxes. Investors then pay taxes on profits received by the corporation. This tax rule is also known as double taxation, meaning that income taxes are paid twice on the same income source. Double taxation occurs when income is taxed at both the corporate and personal levels.

Though the possibility of double taxation is frightening, there are many ways that business owners can lower the taxes. For example, C corps can deduct its operating costs from its revenues, lowering its taxable income. So, if a corporation earns $100,000 in revenue but spends $65,000 on operating expenses in a financial year, the company’s tax liability is only $35,000, not $100,000.

Furthermore, C corp owners only pay their taxes if the corporation pays them profits. So if a C corporation decides not to sell stock and retains profits instead, it can also avoid double taxation.

All C corps must file and submit Form 1120. This report provides the IRS with information on the corporation’s revenue, gains, liabilities, deductions, and income tax payable.

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C corp filing requirements that you need to know

If you decide to run your business as a C corporation, here are the critical C corp filing requirements that you must know: 

  • Choose a business name. Your C corp must be a legal company with a legal reputation established with the authorities. Once you have filed your business as a C corp, you mustn’t operate under another registered name. 
  • File a certificate of organization. Before starting your business as a C corporation, you must file a certificate of organization with the tax agency in your country or state and pay an application fee. The agency will mail you a registration article once you have correctly registered.
  • Get an Employer Identification Number (EIN) and banking information. The IRS will only issue companies with an Employer Identification Number (EIN) and a commercial bank account.
  • Make a business agreement. Each entity level has different operating rules and regulations. A C corp’s rules identify its shareholders, restrict the number of shareholders, and establish financial distribution criteria.
  • Have a business representative. A C corporation must have a local representative who handles legal and tax paperwork on the company’s behalf.
  • Establish a board of directors. A C corporation should have an executive board of directors voted by the company’s shareholders. The board members are responsible for managing the corporation, making major business decisions, hiring, firing, managing officers, etc. 
  • Give out stock certificates. Shareholders are C corp owners, and they should be issued company shares indicating their ownership position in the corporation.

It’s also important to keep up with changes in tax rules and regulations, which can occur at any level. This can be particularly challenging if your company has multiple locations in different states, requiring you to follow tax rules in each jurisdiction.

The bottom line

A C corporation is the right corporate type for your company if you want to attract many investors, work with international partners, or sell internationally. If you choose to file your business as a corporation, it’s extremely important to be aware of C corp filing requirements, keep yourself updated on the tax rules and tax changes, and keep in hand the most suitable accounting tools to help your business prepare and file taxes accurately. 

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Special Corporate Tax Deductions That You Need to Know

Tax season is usually the least exciting time of the year for business owners, and filing corporate tax can bring headaches. But in most cases, business owners aren’t aware of all the special corporate tax deductions available only to them. 

Check this article to find out if you’re missing potential savings by not taking advantage of all these deductions! 

Dividends received deduction 

The dividends received deduction (DRD) is a federal tax deduction in the US that applies to certain corporations that get dividends from related entities. 

Similar to individuals, corporations must pay tax on the dividends they receive from other corporations, but usually at a higher tax rate. Without a special corporate tax deductions rule, the tax rate on dividends received is often damaging to corporations because they are taxed at three or more taxation levels.

In particular, a corporation pays the first taxation level on its income before distributing its after-tax income to its shareholders. The second taxation level incurs when the shareholders pay their taxes on their dividends. The third taxation level is when the corporation distributes the after-tax income from the dividends to its shareholders. There are even more levels of tax depending on the business’s structure. 

Generally, a US corporation may deduct 50% to 100% of dividends received in calculating taxable income. Different tiers of possible deductions depend on how much ownership the company has in the dividend-paying company. 

Particularly, the deduction rate for tax years beginning after 2017 is 50% of dividends received when the ownership percentage is less than 20%. This rate increases to 65% when the ownership percentage is at least 20% but less than 80%. The DRD rate is 100% deductible when the ownership is 80% or more.

However, there are several rules that corporate shareholders must follow to qualify for a DRD, including: 

  • Corporations cannot deduct bonuses from a real estate investment trust (REIT) or capital gains from a managed investment company.
  • Dividends received from domestic companies have different deduction rules than dividends received from foreign corporations.
  • The DRD is only legalized if the corporation has held the stock for more than 45 days.

Organizational cost deduction

Another special deduction available only to corporations is organizational costs. Organizational costs are expenses for organizing a corporation or partnership, including but not limited to: 

  • Legal services
  • Accounting services
  • State fees for incorporation or filing fees for partnerships
  • Expenses for temporary directors and organizational meetings for corporations

Organizational expenses do not include those incurred to issue or sell stock shares or transfer assets to a corporation. Organizational expenses are also different from start-up expenses. Start-up expenses include business investigation costs (e.g., market surveys) and operating expenses, which are incurred before a business officially launches. 

If your business type is a corporation, you can deduct up to $5,000 of your organizational costs and amortize the remaining over 180 months. The $5,000 deducted for organizational costs must be reduced by the amount by which the costs exceed $50,000.

Only expenses incurred prior to the end of the tax year in which the corporation started its business are eligible for deductions. However, a corporation still can claim this deduction by capitalizing all organizational costs and deducting them when the company is liquidated or terminated.

The bottom line

Understanding your qualifying corporate tax deductions helps you lower your tax liabilities, save and invest money in other potential areas. If you’d like to explore more helpful tax knowledge and tax-prep tips, we encourage you to subscribe to the Shoeboxed blog

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Shoeboxed is a receipt management application that turns your receipts and business documents into a digital format in just one click by taking a picture straight from your smartphone or scanning a pdf. It automatically extracts, categorizes, and human-verifies important data from your receipts so that you can go over and check your records anytime with ease. Shoeboxed ensures you will always have your receipts securely stored and ready for tax purposes.

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How to Determine Your Corporate Income Tax Liability

If you’re working as an employee in the US, filing your annual tax return is usually a simple process of reviewing the tax tables for the year and calculating your income tax on Form 1040. However, tax filing is a little more complicated for those who are self-employed or run a corporation. In this article, we’ll help you determine your corporate income tax liability based on your business entity type. Let’s dive in!

What is tax liability?

Tax liability is the amount of money you owe to the US government based on the current income of your business. Only C corporations are subject to paying corporate income taxes. 

On the other hand, if your business structure is a sole proprietorship, partnership, S corporation, or LLC, you’ll be subject to pass-through taxation, which means that any profits earned will be taxed on your personal tax return.

How to determine your corporate income tax liability

If your business is a C-corp, you’ll need to pay your taxes at a federal corporate tax rate, which is a flat 21%, plus your state tax rate, which varies by state.

According to the US tax system, C corporations pay their taxes twice: at the corporate level and then again at the shareholders level when they receive the profits as dividends. For example, if a C corporation distributed all or part of its $1 million in profit to shareholders, they will be taxed on it again when they file their individual tax returns.

One way for C-corps to avoid this double taxation is to incorporate as an S-corp instead of a C-corp. S corporations are flow-through entities, meaning profits and losses flow through the business to owners and shareholders. By that, S corporations don’t have to pay the corporate income tax liability. However, there are certain drawbacks in the S corporation status that may exceed the tax savings. You can discuss choosing your business type with a tax professional or a certified public accountant. 

If your business is not a C-corp, you should calculate and keep track of your business tax liability quarterly based on your annual taxable income. Estimating your business tax liability on a regular basis enables you to make quarterly payments to the IRS, avoiding facing a big tax bill at the end of the fiscal year. If you’re not sure how to calculate your corporate tax, check our guides on filing taxes as a corporation and an independent contractor: 

Bonus: Other types of tax liabilities 

Corporate income tax liability is just one of several tax liabilities your business may have. There are a couple of other tax liabilities to consider, such as the following.

Self-employment tax 

If you work as a sole proprietor, you must file Schedule C for your business. This means you’ll need to pay self-employment tax. In most cases, the self-employment tax liability is calculated at the same time as your tax return. Self-employment tax liability is included in your tax bill by multiplying your estimated taxable income by 15.3 %.

Don’t forget that half of your self-employment tax is deductible! For example, if you have $50,000 in taxable income per year, your self-employment tax is $7,650. However, half of that, or $3,825, would be fully deductible.

Sales tax 

If you sell products in your business’s jurisdiction, you’re responsible for paying sales tax. Similar to employee income tax withholding, sales tax should be collected from customers at the time of purchase. It’s recorded as a liability at the same time, and the amount is offset by the sales tax you charge and collect from your customers.

Payroll tax 

Payroll tax includes the income tax you withhold from staff paychecks, along with the employer portion of Federal Insurance Contributions (FICA) and any state and federal unemployment taxes.

The bottom line

Understanding your corporate income tax liability helps you control your financial situation, manage your budget properly, stay on top of your business expenses and deductions, and make more accurate decisions. If you’d like to explore more helpful accounting knowledge, tax preparation tips, and engaging success stories, we encourage you to subscribe to the Shoeboxed blog

Shoeboxed is an online application that can transform your receipts and documents into digital in just a click. Then, it automatically extracts, categorizes, and human-verifies important data from your receipts so that you can go over and check your records anytime with ease. Shoeboxed ensures you will always have your receipts securely stored and ready for tax purposes. 
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