The Complete Guide to C-Corporation Taxation
Understanding the 21% flat rate, double taxation, and when C-Corp structure makes sense for your business. Includes QSBS changes under OBBBA (July 2025).
Key Takeaways
- 21% flat federal rate on all C-Corp taxable income (unchanged by OBBBA)
- Double taxation occurs when profits are taxed at corporate level, then dividends taxed again to shareholders (combined rate approximately 36-40%)
- QSBS (Section 1202) can exclude up to $15 million in capital gains on C-Corp stock sale (OBBBA increased from $10M)
- New QSBS tiered holding periods (OBBBA): 50% at 3+ years, 75% at 4+ years, 100% at 5+ years
- 100% Bonus Depreciation now permanent under OBBBA (was phasing out)
- R&D expensing restored: domestic R&D expenses fully deductible immediately
- Most small businesses should NOT be C-Corps unless raising VC, pursuing QSBS, or reinvesting all profits
C-Corporations are separate tax entities that pay a flat 21% federal income tax on profits. When those profits are distributed as dividends, shareholders pay tax again (0-20%), creating “double taxation.” This makes C-Corps less common for small businesses. However, C-Corps are required for venture capital fundraising and QSBS benefits, which can exclude up to $15 million in capital gains from tax.
What Makes C-Corporations Different
C-Corporations are the traditional corporate structure in America. When you incorporate in any state, you’re automatically a C-Corp. While S-Corporations and LLCs have become more popular for small businesses, C-Corps still serve important purposes: raising venture capital, accessing QSBS benefits, and certain planning strategies for high-growth companies.
The C-Corp’s defining characteristic is that it’s a separate tax entity from its owners. The corporation files its own return (Form 1120), pays its own taxes at a flat 21% rate, and when it distributes profits as dividends, shareholders pay tax again. This “double taxation” is why most small businesses avoid C-Corp status.
But it’s not always the wrong choice.
When C-Corp Makes Sense
If you’re raising venture capital, planning for QSBS benefits, or reinvesting all profits for growth, C-Corp may be exactly right. The key is understanding when the benefits outweigh the double taxation cost.
How C-Corporation Taxation Works
The Corporate Tax Rate
C-Corporations pay a flat 21% federal income tax rate on all taxable income. This rate was established by the Tax Cuts and Jobs Act of 2017 and remains unchanged under OBBBA 2025. The rate applies regardless of income level. A $100,000 profit and a $10 million profit both face 21%.
State taxes add to this. Most states impose corporate income tax ranging from 0% (Nevada, Wyoming, South Dakota) to over 10% (Iowa, Pennsylvania). Combined federal and state rates typically range from 21% to 30%.
The Double Taxation Reality
Here’s how double taxation works in practice:
Double Taxation Example: $100,000 Corporate Profit
For high earners in the 20% dividend bracket (plus 3.8% Net Investment Income Tax), the combined rate reaches approximately 40%. Compare this to S-Corp pass-through at ordinary rates (up to 37%, but often lower with the QBI deduction). The math often favors pass-through, but not always.
Strategies to Minimize Double Taxation
If you must be a C-Corp (or choose to be for strategic reasons), you can minimize double taxation through:
- Reasonable salary: Pay owners as employees. Salary is deductible to the corporation and taxed once to the owner.
- Retirement contributions: Corporate contributions to owner’s 401(k) or pension plan are deductible and tax-deferred.
- Reinvestment: If profits stay in the company (no dividends), there’s no second tax. Build value for eventual sale.
- Interest payments: Properly structured shareholder loans can create deductible interest payments.
- Fringe benefits: C-Corps can provide certain tax-free benefits to owner-employees that S-Corps can’t.
Warning: Accumulated Earnings Tax
If you retain too much profit without a business purpose (over approximately $250,000), the IRS can impose an accumulated earnings tax (20%). This prevents companies from hoarding cash just to avoid dividends. Document your business reasons for retaining earnings.
When C-Corporation Structure Makes Sense
Despite double taxation, C-Corps are the right choice in specific situations:
Venture Capital & Outside Investment
VCs and institutional investors strongly prefer (often require) C-Corps. Clean equity structure for multiple funding rounds, no pass-through losses complicating investor taxes, and standardized governance. If you’re raising institutional capital, you’ll likely be a Delaware C-Corp.
QSBS Tax Exclusion
Section 1202 QSBS can exclude up to 100% of gain on C-Corp stock sale. Under OBBBA 2025, the exclusion cap increased to $15M with new tiered holding periods. For high-growth startups with potential large exits, QSBS alone can justify C-Corp status. Learn more about QSBS.
Reinvestment Strategy
If you’re reinvesting all profits into growth: the 21% corporate rate beats high-bracket individual rates, no dividends means no double taxation yet, and you build value for eventual sale (potentially QSBS-eligible).
Fringe Benefit Optimization
C-Corps can deduct certain fringe benefits that aren’t fully deductible for S-Corps: health insurance for greater-than-2% shareholders, group term life insurance, and certain disability insurance. For owner-employees in high tax brackets, these benefits can be valuable.
Foreign Ownership Situations
S-Corporations cannot have foreign shareholders. If you have international investors or owners, C-Corp may be your only corporate option. See our international tax services for guidance on foreign ownership structures.
OBBBA 2025 Enhanced QSBS Benefits
The One Big Beautiful Bill Act (signed July 4, 2025) significantly enhanced Section 1202 QSBS benefits for stock issued after that date:
| Change | Pre-OBBBA | Post-OBBBA (7/4/25+) |
|---|---|---|
| Maximum exclusion cap | $10 million | $15 million (indexed after 2026) |
| Gross asset threshold | $50 million | $75 million (indexed after 2026) |
| 100% exclusion | 5+ years only | 5+ years (unchanged) |
| 75% exclusion tier | N/A | 4+ years (new) |
| 50% exclusion tier | N/A | 3+ years (new) |
Planning note: Pre-OBBBA QSBS still requires 5+ years for any exclusion. Stock acquired before and after July 4, 2025 must be tracked separately.
C-Corporation vs. S-Corporation: Key Differences
| Factor | C-Corporation | S-Corporation |
|---|---|---|
| Tax rate | Flat 21% corporate + dividend tax | Pass-through at individual rates |
| Double taxation | Yes (on dividends) | No (single level) |
| QBI deduction | No | Yes (up to 20% deduction) |
| Self-employment tax | N/A (owner is employee) | Avoided on distributions |
| Shareholder limits | Unlimited | 100 shareholders, US individuals/trusts only |
| Stock classes | Multiple classes allowed | One class only |
| QSBS eligible | Yes | No |
| Outside investors | Preferred by VCs | Difficult for institutional |
| Foreign shareholders | Allowed | Not allowed |
| Fiscal year | Any year-end allowed | Generally calendar year |
The Typical Recommendation
For most small businesses with active owners who need distributions:
S-Corp usually wins because you avoid double taxation, get the QBI deduction (up to 20% off), save self-employment tax on distributions, and face simpler overall compliance. See our S-Corporation Tax Guide for details.
C-Corp wins when:
- Raising venture capital
- QSBS strategy applies (expecting large exit)
- Reinvesting all profits (no distributions needed)
- Foreign shareholders are involved
- Planning complex equity structures
For a full comparison including LLCs and partnerships, see our Business Entity Tax Guide.
Form 1120: C-Corporation Tax Return
Filing Requirements
C-Corporations file Form 1120 annually:
- Due date: 15th day of 4th month after year-end (April 15 for calendar year)
- Extension: 6-month extension available via Form 7004
- Estimated taxes: Required if expecting $500+ tax liability (quarterly payments)
Key Schedules
- Schedule K: Shareholders and ownership
- Schedule L: Balance sheet
- Schedule M-1: Reconciliation of book to tax income
- Schedule M-2: Analysis of unappropriated retained earnings
Common Issues
Reasonable compensation: If owner-employees are underpaid, IRS may recharacterize dividends as wages, triggering payroll taxes. Pay market-rate salaries.
Related-party transactions: Transactions with shareholders must be at arm’s length. Document fair market value.
Accumulated earnings: Must justify retained earnings over $250,000 to avoid additional tax. Keep records of business purposes.
Converting To or From C-Corporation Status
S-Corp to C-Corp
Relatively simple process. Revoke the S election and you’re a C-Corp. However:
- Built-in gains tax may apply if you were previously a C-Corp
- Consider timing carefully around fiscal year-end
- May make sense before a VC raise or to start the QSBS clock
C-Corp to S-Corp
More complex due to:
- Built-in gains tax: 21% tax on gains recognized on assets that appreciated while a C-Corp, for 5 years post-conversion
- AAA tracking: Accumulated Adjustments Account begins at conversion
- E&P considerations: Earnings and profits carry forward; distributions from E&P are taxed as dividends
Generally, earlier conversion is easier. The longer you operate as C-Corp, the more tax complexity in converting.
Liquidating a C-Corp
Double taxation hits hard on liquidation:
- Corporation recognizes gain on asset distribution
- Shareholders recognize gain on liquidating distribution
This is why planning entity structure early matters. If you might need to distribute assets eventually, consider whether C-Corp is the right long-term structure.
C-Corporation FAQs
What is the C-Corp tax rate for 2026?
The federal C-Corporation tax rate is a flat 21% on all taxable income. This rate was established by the Tax Cuts and Jobs Act of 2017 and remains unchanged by OBBBA 2025. Combined with state corporate taxes (ranging from 0% to over 10%), the effective rate typically ranges from 21% to 30%.
Do all corporations start as C-Corps?
Yes. When you incorporate in any state, you’re automatically a C-Corporation. You must file Form 2553 to elect S-Corporation status within 75 days of formation (or by March 15 for calendar-year elections). LLCs can elect corporate taxation (C or S) via Form 8832 or 2553, but aren’t automatically corporations.
Can I avoid double taxation in a C-Corp?
You can minimize double taxation through reasonable salary (deductible to the corporation, taxed once to you), retirement contributions, and reinvesting profits instead of distributing dividends. If you need to distribute cash, you’ll face double taxation. QSBS can eliminate the second tax entirely on exit if you qualify for the exclusion.
What is QSBS and why does it matter?
Qualified Small Business Stock (Section 1202) can exclude up to 100% of capital gains on the sale of qualifying C-Corp stock. Under OBBBA 2025, the exclusion cap increased to $15 million (from $10M) with a gross asset threshold of $75 million (from $50M). New tiered holding periods allow 50% exclusion at 3+ years, 75% at 4+ years, and 100% at 5+ years. For founders of successful startups, this can mean $0 federal tax on a significant exit. Read our full QSBS guide.
Should my startup be a C-Corp?
If you’re raising venture capital, likely yes. VCs typically require C-Corp structure for clean equity rounds and investor tax treatment. If you’re bootstrapping and taking profits along the way, probably not. S-Corp or LLC may be better for ongoing distributions. QSBS potential is a strong consideration for high-growth companies expecting large exits. See our startup CPA services for entity guidance.
Can a C-Corp have one owner?
Yes. There’s no minimum shareholder requirement for C-Corporations. Single-owner C-Corps are common for certain planning strategies, especially when QSBS benefits are the goal or when the owner wants to reinvest all profits at the 21% corporate rate rather than higher individual rates.
How does a C-Corp pay its owner?
Through salary (as a W-2 employee), dividends (if the corporation is profitable), or both. Salary is deductible to the corporation and taxed once to the owner at ordinary income rates. Dividends are not deductible (paid from after-tax corporate profits) and create double taxation. The balance between salary and dividends is a planning consideration based on your specific situation.
What changed with QSBS under OBBBA 2025?
For stock issued after July 4, 2025: the exclusion cap increased from $10M to $15M (indexed for inflation after 2026), the gross asset threshold increased from $50M to $75M, and new tiered holding periods allow partial exclusions (50% at 3 years, 75% at 4 years, 100% at 5 years). Pre-OBBBA stock still follows the old rules, requiring 5+ years for any exclusion. Stock acquired before and after July 4, 2025 must be tracked separately for planning purposes.
C-Corporation Topic Deep Dives
Explore specific C-Corp topics in more detail with our supporting guides:
Detailed side-by-side comparison with real scenarios and clear recommendations
How double taxation works and 5 strategies to minimize it
Form 1120 due dates, extensions, estimated taxes, and penalties
How to elect C-Corp taxation for your LLC via Form 8832
QSBS, 21% rate advantage, bonus depreciation, R&D expensing, and more
Built-in gains tax, E&P tracking, and conversion timing strategies
Related Guides & Resources
Complete guide to S-Corp taxation, elections, and optimization strategies
How to qualify for up to $15M in tax-free capital gains on C-Corp stock
Compare C-Corps, S-Corps, partnerships, and sole proprietorships
Partnership tax rules, basis tracking, and distribution planning
Entity selection, fundraising structure, and startup tax planning
Year-round strategy to reduce your tax bill through proactive planning
Need Help With C-Corporation Decisions?
Whether you’re considering C-Corp structure for QSBS benefits, evaluating entity options for a startup, or need help with Form 1120 preparation, we can help.
Schedule Entity ConsultationOr call us directly: (972) 296-0981
SDO CPA LLC is a licensed CPA firm in the state of Texas. Services described are subject to engagement terms. Tax outcomes depend on individual circumstances. Per Texas State Board of Public Accountancy Rule 501.82, this communication does not guarantee outcomes or imply ability to influence any government agency. AICPA member firm. QSBS qualification requires meeting specific IRS requirements; consult a tax professional for your specific situation.