Photo Credit: Simon Cunningham

Traditional corporations – also called “C-corporations” – usually have thousands of shareholders and pay taxes on their profits at corporate income tax rates. In addition, the corporation’s shareholders pay taxes on any dividends they receive from the corporation. This double taxation dynamic has spawned a myriad of tax credits, deductions and other loopholes in our tax code.

How are C-corporations taxed?

A C-corporation must pay income taxes on its net income, which is basically the revenue left over after deducting eligible expenses. Some of these expenses consume cash, like paying employees or purchasing inventory. Other expenses are non-cash in nature, such as depreciation of equipment. As a result, sometimes a corporation will have cash left in its account in excess of its net income for the year. The federal corporate tax rate is currently 40%. State corporate tax rates vary.

Subtracting Eligible Deductions

Corporations can write off everything from startup costs to the salaries of the employees. Almost anything that has viably contributed to the pursuit of the corporation’s profit is usually considered deductible. However, impeccable records must be kept when itemizing deductions. An IRS audit requires bookkeepers to turn over receipts for all expenses deducted during the time in question. Stiff penalties and interest will apply to unpaid taxes, and criminal sanctions like fines and even jail time can be assessed for intentionally defrauding the IRS, so corporate accountants have to be particularly precise.

Other Tax-Related Corporate Benefits

Corporations have access to certain government contracts upon which LLC’s and partnerships are not permitted to bid. Corporations can also be eligible for certain tax credits and deductions aimed at activities or industries the government wants to encourage, such as research and development of certain products, or growing certain types of crops. Corporations can also receive grants for which other businesses are ineligible. Corporations are also allowed to write off fringe benefits that are paid to employees. These are typically reserved for members of the board, but they can include practical benefits like health insurance. Everything from luxury vehicles to private plane flights can also be paid to an employee as a fringe benefit and then written off as a business expense. However, there are limitations on these as well, because a CEO who is deemed to have earned to high a salary can also be subject to legal repercussions.