For C corporations, tax season demands attention. As a distinct business structure, C corps are treated as separate legal and taxable entities from their owners. This means the corporation pays taxes on its profits independently, following its own set of rules for income, deductions, and liabilities. With the tax season wrapping up, now is the perfect time to familiarize yourself with C corp tax rules and lay the groundwork for a financially sound, compliant business.

What makes a C corp unique?

A C corporation is a distinct legal entity—that’s a big deal. Unlike sole proprietorships or LLCs, both of which pass income directly to the owners’ tax returns, a C corp pays taxes on its profits. So, the corporation can hold earnings to enable growth. The separation also shields owners from personal liability. 

C corps are an attractive business structure for investors, too. Successful C corps can issue multiple classes of stock and unlimited shares, allowing for complex equity arrangements that appeal to venture capitalists and institutional investors. But there’s a big tradeoff: double taxation.

What is double taxation, and why does it apply to a C corp?

Double taxation means profits get taxed twice—first at the corporate level and again when distributed as dividends. This is a unique feature of C corps, so here’s how it works:

  • Corporate-level taxation: Before anything else, the C corp itself pays a 21% federal corporate tax on its net earnings. This is the first cut Uncle Sam takes out of your company’s profits.
  • Shareholder taxation on dividends: After the corporation pays its taxes, any remaining profit distributed to shareholders as dividends gets hit again. This second round of taxation occurs on shareholders’ personal tax returns, at rates ranging from 10% to 37%, depending on their income bracket.

The question becomes: How do you manage profits strategically to keep more of what you earn? 

Reducing C corps tax burden

While double taxation is unavoidable for a C corp, there are ways to soften the blow. These strategies don’t skirt the rules—they work within them to keep more money in your business:

  • Limit dividend distributions: Holding earnings keeps them from being taxed twice. But this only works if shareholders are on board and the IRS doesn’t suspect tax avoidance. The funds need to be used by the C corp.
  • Pay salaries, not dividends: Shareholders who also work for the corporation can take salaries instead of dividends. Salaries are deductible for the corporation and taxed only at the individual level, avoiding double taxation altogether. Just keep salaries reasonable, because overpaying will raise red flags.
  • Reimburse business expenses directly: Corporations can reimburse shareholders who incur business-related expenses. These reimbursements are deductible for the C corp. They also don’t count as taxable income for the shareholder. That’s a win-win.

Leveraging C corp tax deductions and credits

C corps enjoy a wide range of deductions and credits that significantly reduce taxable income. Taking advantage of these opportunities is critical for managing your tax burden effectively. Common deductions include:

  • Employee wages and benefits: Salaries, health insurance premiums, and retirement plan contributions are fully deductible.
  • Depreciation: The cost of business assets, like equipment or vehicles, can be deducted over time. Certain assets may qualify for accelerated depreciation under Section 179.
  • Advertising and marketing: Every dollar spent on promoting your business is deductible, from online ads to billboards.

Unlike deductions, tax credits reduce your tax bill dollar for dollar—that’s a direct reduction in a C corps liability. Some of the most valuable credits for C corps include:

  • Research and development (R&D) credit: Encourages innovation by offsetting costs for developing new products or improving existing ones.
  • Work Opportunity Tax Credit (WOTC): Made to incentivize hiring, it rewards companies that hire veterans, long-term unemployed people, and other target groups.
  • Energy credits: Businesses moving to sustainable practices, like adding solar panels or EV charging stations to their premises, can reduce their tax liability through these credits.

Net operating losses (NOLs)

Not every year ends in profit, but did you know your losses don’t have to go to waste? C corps can carry up to 80% of net operating losses (NOLs) to future tax years, reducing taxable income down the line. So, if your business sees a $50,000 loss in 2024 and earns $100,000 in 2025, you can offset up to $40,000 of that income with the previous year’s loss. That often means a big reduction in a C corp’s tax bill.

Tax deadlines and filing requirements for C corps

C corps follow strict tax filing rules. Miss a deadline, and the penalties are steep.

  • For calendar-year corporations: Taxes are due on April 15, 2024.
  • For fiscal-year corporations: Taxes are due on the 15th day of the fourth month after the fiscal year ends.

Need more time? Use IRS Form 7004 to request a 6-month extension. Keep in mind, though, an extension to file isn’t an extension to pay—you’ll still owe interest on any unpaid taxes after the original deadline.

C corps file taxes using IRS Form 1120. It requires detailed records of income, expenses, and deductions. Keep everything organized since mistakes or omissions will likely trigger audits.

Are C corps the right structure for small businesses?

Typically, C corps are large enterprises, but the business structure can benefit smaller companies, too. For startups seeking outside investment, the C corp structure is usually the best option. Investors prefer them for their legal protections and their ability to issue shares.

That said, the tax implications aren’t ideal for most small businesses. If you’re not planning to raise capital or retain significant earnings, another structure—like an S corp or LLC—would likely be more tax-efficient. 

Why a business bank account is a must for C corps

No matter the size of your business, managing C corp taxes is rarely straightforward. While you’re crunching numbers and filing forms, you’ll find staying organized truly helps. A dedicated business bank account is the foundation of clean financial records and an overall smoother tax process.

Here are just some of the benefits:

  • Expense separation: Mixing personal and business expenses complicates tax prep and can lead to missed deductions. Messy records complicate taxes and cost you missed deductions.
  • Streamlined reporting: A business account keeps income and spending neatly organized, so it’s easier to file Form 1120 and claim deductions.
  • Professionalism: Perception always matters. Banks, investors, clients, and vendors take your business more seriously when you operate with a dedicated account.

North One takes business banking a step further. With features like automated expense categorization and seamless integration with accounting software, you’ll find simplified financial management for C corps of all sizes.

Maximize your C corp’s potential with the right banking partner

Taxes are a reality, but they don’t have to set back your business’ potential. Aside from staying compliant, knowing how the C corp tax works can help you turn obligations into opportunities. The right strategies protect your profits and keep your finances strong. 

Need a strong banking partner that helps you stay ahead? North one has your back. From seamless expense tracking to smart financial tools, it’s built to take the stress out of tax season and put the focus where it belongs—on growing your business. Open your account today and see how effortless managing your C corp’s finances can be.