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C Corporations: Corporation tax, Form 1120, How to file
Deciding how to incorporate your business can make a big difference down the road. From understanding how to file business taxes and regulations to ensure your business grows, a lot is weighing on your decision. There are different entity types when it comes to incorporating, and each has its pros and cons depending on business needs and goals.
This guide will explain how to file corporate taxes, the 1120 tax form, tax planning for c corps and the benefits of a C Corp.
Table of contents
What is a C Corporation?...Read more
How to start a C Corp...Read more
C Corp Taxes...Read more
Benefits of a C Corp...Read more
When to incorporate as a C Corp...Read more
C Corporation vs S Corporation...Read more
C Corp vs LLC...Read more
How to file taxes as a corporation...Read more
What is Form 1120?...Read more
How is the 1120 form different from Schedule C?...Read more
What is tax planning for C Corps?...Read more
What is the main corporate tax return?...Read more
What is a C Corporation?
The C Corp definition is a type of business owned by shareholders and is ruled by the laws established by the shareholders. Shareholders and business owners are taxed separately from the C Corporation. If you establish a C Corporation, your shareholders are required to vote on a board of directors and hold annual meetings. Some examples of C Corporations include Apple, Walmart, McDonald's and Starbucks.
How to start a C Corp
Starting a C Corporation can be complicated. First, you need to give your business a unique name and appoint officers, including a board of directors and a CEO. Then you’ll need to draft the articles of incorporation with your secretary of state and write the company bylaws.
Next, you’ll need to issue stock and apply for a business license at the municipal, county and state levels. Lastly, file Form SS-4 to secure your employer identification number (EID) from the IRS, along with any other ID numbers based on your state’s requirements. You also have to research C Corp tax filing and the corporation tax return (1120 form).
C Corp Taxes
No one likes paying taxes. C Corps belong to the special double taxation category. With double taxation, the corporation pays corporate taxes on its earnings and dividend taxes are paid by the shareholders.
The federal corporate tax rate is 21%. C Corporations need to complete the 1099 tax form, 1099-DIV, which goes to each shareholder, which gives a summary of the profits distributed to them. Form 1120 reports the taxable earnings, tax deductions and gross income.
The two types of dividends are qualified and nonqualified. Qualified dividends have a lower tax rate but must be paid to shareholders from qualifying US or foreign corporations. Also, following the 120-day holding-period return, the shareholder needs to hold the stock for at least 60 of the 120 days.
Nonqualified dividends don’t receive any special tax privileges and don’t meet the standard dividend requirements. Some types of dividends are automatically considered non-qualified.
There are a few ways to avoid corporate tax. Instead of distributing the income earnings to the shareholders as dividends, simply withhold the earnings. This option is only available if you’re able to reinvest the investments into the company.
Or, you can distribute income as a bonus or salary instead of dividends. The bonus or salary payments are tax deductible for the C Corporation, but the recipients will be taxed. Lastly, taking only a portion of the company’s profits as salary and leaving the rest as reinvestment will lower both the taxable income for the corporation and the owner’s total income, reducing the overall tax amount. You'll still be expected to make estimated tax payments.
Benefits of a C Corp
Raising numerous rounds of venture capital is usually necessary for startups. This will help the company reach its targets for growth and size. Usually, institutional investors and venture funds will only invest in C Corps for a variety of reasons, but the tax structure is usually a driving force.
For startup companies, programs like incubators and accelerators are great ways to receive support in many areas like funding, investor access and product development. These programs prefer C Corporations over other types of entities.
C Corps can offer equity incentive plans, including stock options, to employees. Providing insensitive plans can instill a desire for the company’s long-term success and attract and retain talented individuals.
If you want to bring on advisors to help guide the company during certain milestones, stock options are usually the option for compensating the advisors. C Corps have the power to distribute those stock options.
The qualified small business stock amendment (QSBS) was passed in 1993 in 2009 to make C Corps the first and only entity to receive eligibility. The QSBS allows small business owners to be exempt from paying capital gains tax on certain stock sales if they held their shares for five years or more.
When to incorporate as a C Corp
There are several reasons why a C Corp might be the right choice for your business.
Protection
Lasting business
Limited budget
C Corporation vs S Corporation
It can be difficult to know which type of corporate entity to choose. There are pros and cons when comparing a C Corp vs S Corp. A C Corporation is the standard option or default option with the IRS. With an S Corp, the corporation has opted to apply for a different tax status.
Let’s break down the similarities between a C Corp vs S Corp. Both get their names from the chapter in the IRS code in which they’re taxed and are considered separate legal entities. Also, you can get limited liability protection with either option so shareholders won’t be responsible for business debts. Finally, C Corps and S Corps have similar structures meaning they have directors, members and shareholders.
However, there are some big differences between a C Corporation vs S corporation. When it comes to taxes, a C Corp has to pay corporate taxes and files a corporate tax return, facing double taxation.
On the other hand, since S Corps are pass-through entities, they file Form 1120-S, which is only used for informational purposes. So the income distribution to shareholders is taxed only at the individual level.
C Corps have freedom when it comes to company shareholders, whereas S Corps have a lot more restrictions in place, like having no more than 100 shareholders. Filing taxes for a business is difficult enough, so consider consulting with a tax pro to understand what corporation is best for you.
C Corp vs LLC
There’s no denying that starting and managing an LLC is much easier than other corporations. Since the process is started under state law, the process of forming an LLC depends on the individual state’s law.
When it comes to filing business tax, LLC members have the freedom to choose the way they’re taxed. They can be taxed as a sole proprietorship, a corporation or a partnership. They do have to pay self-employment taxes if they are sole proprietor or partnership. C Corporations are taxed separately from the owners and pay corporate income tax.
An LLC company can’t offer stock options, and all the profits are distributed to the members. A C Corporation has the option to keep the profits within the business and distribute dividends as payment to the shareholders.
Both entities have powerful legal advantages, which help protect assets from creditors and provide protection against legal liability. When it comes to choosing between C Corp vs LLC, it comes to which option is better suited for your business goals.
How to file taxes as a corporation
Filing taxes as a corporation is complicated but here are the basics. If you’re a C corporation, you’ll primarily use Form 1120 for your tax filing. The 1120 tax form reports your corporation’s financial information.
First, collect all your financial statements. You'll need to input your revenue, cost of goods sold and expenses on the form. Keep track of any deductions your corporation may qualify for as they can significantly lower your taxable income.
When completing the C corp tax filing, you’ll also have to calculate your corporate tax rate. Keep in mind that your filing deadline typically falls on the 15th day of the fourth month after the end of your corporation's tax year. If you need extra time, you can file for an extension, but know that this doesn’t extend the time to pay any taxes owed. Most corporations hire CPAs to help with C Corp tax filing and handling the Form 1120.
What is Form 1120?
Form 1120 is the essential document that C corporations use to report their income and calculate C corp taxes. The 1120 tax form is where businesses disclose their total income, including revenue from sales, investments and other sources.
One of the key aspects of Form 1120 is its role in calculating the corporate income tax. The IRS applies a federal corporate tax rate to the taxable income reported on this form. Currently, the rate is a flat 21% C Corp taxes in the US.
When filling out the form, you'll need to provide details about your company’s deductions and credits, which can help lower your taxable income. Common deductions include business expenses like rent and operational costs. The more deductions you can claim, the lower your C Corp taxes will be. It's important to file the 1120 form on time, typically by the 15th day of the fourth month after the end of your tax year.
How is the 1120 form different from Schedule C?
The 1120 form and Schedule C serve different purposes and are used by different types of businesses. The 1120 tax form is specifically designed for C corporations, while Schedule C is used by sole proprietors to report income and expenses from their businesses.
When you're dealing with C corp taxes, you’ll file the 1120 form to report your corporation’s earnings, deductions and the overall corporate income tax owed. This form requires detailed financial information and is subject to the corporate tax rate (21%). The filing process involves following the Form 1120 instructions carefully to ensure you include all necessary details, like revenue and deductible expenses.
On the other hand, Schedule C is different from the 1120 form as it is part of the individual tax return (Form 1040) for sole proprietors. It allows them to report business income and expenses directly on their personal tax returns, which means they pay taxes at their individual income tax rates.
Additionally, the structure of these forms reflects their different tax treatments. While the 1120 focuses on corporate profits and losses, Schedule C emphasizes individual earnings and expenses.
What is tax planning for C Corps?
Tax planning for C Corps is all about strategizing to keep more money in your business's pocket while navigating the complexities of corporation tax. Since C corporations deal with the C Corporation tax rate and regular tax, you really want to make the most of your tax planning efforts.
One of the first things to focus on is maximizing your deductions. This means tracking expenses like benefits and office supplies. Every little bit counts, and knowing what you can deduct helps lower your C Corp taxes.
Timing is another big piece of the puzzle when it comes to C Corp taxes. If you think your income might dip in the coming year, consider deferring income or accelerating some expenses. For example, if you know you’ll be investing in new equipment, it might make sense to make that purchase before year-end to lower your taxable income and make filing taxes for business easier.
Working with a tax professional can also be helpful. They can help with filing business taxes and your C Corp tax filing is as efficient as possible.
What is the main corporate tax return?
The main corporate tax return for C corporations is the Form 1120. This form is essential for reporting your business's income, gains, losses, deductions and credits. If you're running a C corporation, understanding how to complete this form is a big part of it, as it directly impacts how much you pay in corporate taxes.
When you fill out the 1120 tax form, you’ll need to provide detailed financial information. You can find the Form 1120 instructions on the IRS website along with more information about how to file business taxes.
One of the key aspects of the corporate tax return is calculating your taxable income. This involves applying the current C corporation tax rate. This rate simplifies things compared to previous systems with multiple brackets.
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