A C corporation is a type of business entity according to the law of the U.S. As it denotes corporation classification, it exists as an entity that is entirely independent of its owners. Ownership in C corporations comes in the form of the total number of company stocks.
Owners of C corporations need to pay taxes at the shareholder level and the corporate level as well. However, there are a few things that you need to consider before you can calculate your estimated tax payments as a C corporation.
Subchapter C Corporation
A C corporation is an entity that operates entirely independently of the owners, and as a result, it’s taxed separately. The tax structure means that a C corporation will go through double taxation. Double taxation means that they’ll have to pay taxes at two different levels.
The two levels are the corporate and shareholder level. The corporate tax rate is a fixed amount for every year. So regardless of what the corporation earns, they’ll have to pay 21% of that as corporate taxes. Taxes at the shareholder level means that owners will also have to pay tax on their dividends.
C corporations are significantly different from limited liability companies. There are certain avoidance provisions in place to ensure that there’s partial double taxation, not full. Now that you have an understanding of how C corporations are taxed, we can move on to the subject of calculating the tax liability.
Calculating Taxable Income
The first step in calculating total tax liability is identifying the total taxable income for your C corporation. Conveniently, the method for calculating the Company's taxable income for C corporations is the same as other business entities.
Remember that C corporations are the only form of business that pays corporate income taxes.
Here are all the steps you need to know to calculate taxable income:
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STEP 1: CALCULATE REVENUES
The first step in the process is calculating the total revenues of the organization. These revenues include what the business makes from sales, investments, franchise fees, any potential compensation for patent or copyright infringement.
It’s essential to become familiar with the different types of revenue that your C corporation might earn. That way, you’ll be able to accurately calculate exactly how much revenue your business makes. Unfortunately, most people aren’t familiar with all the different types of revenue that their business can earn.
That’s why so many people turn towards hiring an accountant or a CFA to help them find their business tax liability. It’s essential to take into consideration revenue that needs to be adjusted over several years based on the accrual principle.
Keep all these things in mind when calculating total business revenue.
STEP 2: CALCULATING NON-CAPITAL BUSINESS EXPENSES
You’ll need to add together all the different business expenses, excluding anything you spend on assets you can use over several years. These expenses include the cost of raw materials used in the direct production of goods and selling, general and administrative expenses.
People often forget, but any interest payments that the business has to make also fall under the category of non-capital business expenses.
STEP 3: CALCULATING CAPITAL BUSINESS EXPENSES
These expenses will include all the factors that you excluded while calculating the total non-capital business expenses. It consists of all assets that have a useful life of over a year. This covers assets like machinery, vehicle, property, etc.
The total cost you bear to get the assets isn’t deducted in the first year but is spread over the years. It’s deducted based on depreciation. Depending on your state, the depreciation laws can differ.
STEP 4: GETTING TAXABLE INCOME
The final step in the process is taking both the capital and non-capital business expenses and subtracting the value from the revenue. Your answer will equal the corporation’s total taxable income.
Now that you know how to calculate taxable income for C corporations, you’re one step closer to calculating the total tax liability of your organization. However, before moving further, it’s essential to discuss a few benefits that C corporations receive.
These benefits are one of the main reasons why business owners choose to incorporate themselves as a C corporation.
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Tax Benefits Of C Corporations
MINIMIZE OVERALL TAX BURDEN
One of the most significant reasons why so many people are shifting towards C corporations is they can help minimize the overall tax burden. Since the 2018 tax reform bill, C corporations have had a tax rate of 21%, regardless of how much income they earn.
The new corporate tax rate of 21% can help indicate significant tax savings for all businesses that are operating as C corporations. It’s especially beneficial for companies that don’t declare dividends every year.
If the business owners are only taking a salary, then they don’t have to pay taxes at the corporate rate. That means even more tax savings for the business owners. It makes a lot of sense for new or small businesses to not declare dividends every year. They can use the tax savings to reinvest into the organization and help it grow.
FLEXIBLE FISCAL YEAR SCHEDULES
C corporations have a lot more flexibility in determining their fiscal year than other types of business entities. Business types like LLCs and S corps need to match their fiscal years with the general business calendar year.
Due to the flexibility that C corporations provide, shareholders can shift their income easily. As a result, business owners can decide on what year they’d like to pay corporate tax on bonuses and when they’d like to incur any losses. Freedom can help substantially reduce the tax bill for an organization.
ACCUMULATE FUNDS AT A LOWER TAX COST
The nature of the C corporation model ensures that shareholders can shift their income readily and retain any earnings for future growth. Moreover, they can do so at a much lower cost than any pass-through entity.
WRITING OFF SALARIES AND BONUSES
All of the shareholders in C corps serve as salaried employees and they will have to pay employment taxes. While the salaries and bonuses are subject to payroll taxes, social security contributions, and Medicare contributions, c corporations can fully deduce their share of corporation taxes for payroll.
C corporations also have the capacity to pay their employees enough so that no taxable profits remain at the end of the fiscal year. However, it’s essential for corporations to do this in a manner that the Internal Revenue Service (IRS) approves. The IRS will check to ensure whether the shareholder is providing services to the organization that accurately reflect the salary he receives, thereby mitigating any potential liability for self-employment tax.
Instead of going through double taxation, shareholders use this method quite frequently.
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DEDUCTING MEDICAL PREMIUMS AND OTHER FRINGE BENEFITS
If C corporations make all fringe benefits equally available to all their employees and not just the shareholders, many tax write-offs are available to C corps. Individual employees are also available to receive tax-free medical reimbursement plans, premiums for health, long-term care, and disability insurance.
CARRY LOSSES OVER MULTIPLE YEARS
The business structure of C corporations allows them to carry significant capital and operating losses. As a result, the IRS doesn’t scrutinize businesses, especially ones that open recently, for suffering any significant losses even if they showcase losses for several years running.
It’s a feature that’s especially beneficial for start-ups as they might incur substantial losses in the first year of operation. Having C corporation status helps ensure that the start-up can carry forward its losses into the next few years.
Now that you have a fair understanding of the numerous tax benefits C corporations provide let’s look at how you can calculate tax liability from your total taxable income.
Calculating the Total Tax Liability
STEP 1: SUBTRACT DEDUCTIONS FROM TAXABLE INCOME
The first step in calculating the total tax liability from income taxes is making the usual deductions. These tax deductions include the total amount of state taxes paid, charitable contributions, and available dividend deductions.
C corporations need to subtract all potential deductions from taxable income to get a figure for adjusted taxable income.
STEP 2: CALCULATE THE TOTAL PAYABLE TAX
Once you have the adjusted taxable income, you can multiply the value by 21% to get the total payable tax for the current year. Under the 2018 tax reform bill, C corporations will have to pay a flat tax of 21% on all earnings.
Calculating the total tax the C corporation needs to pay is a simple matter of multiplying the adjusted taxable income by 21%.
STEP 3: CALCULATE INCOME TAX LIABILITY
To get the total corporate income tax liability for the C corporation, you’ll need to subtract any potential tax credits from the total tax payable. These tax credits are available for certain industries, research and development, job creation, and hiring disadvantaged workers, among other reasons.
After subtracting the tax credits, you’ll get the total tax liabilities for your C corporation.
These are all the different steps you need to know to calculate total tax liability for your C corporation. However, calculating the total tax liability for C corporations is the first step. The more important step is paying the taxes properly and on time!
If any of the information provided above made you feel confused, don’t stress because you are not alone. There are many other businesses that have faced similar problems in the past. However, with time, they have fared well with just a little help.
If you are struggling or just don't have the time to keep up with it, it may be time to have Hall Accounting take over and invest with accurate accounting records and financial reports. The Hall Accounting team will manage your records from start to finish and make sure all adjustments are timely recorded. This option is also feasible for small businesses because it is cheap and hassle-free, at a fixed monthly rate.