W-9 Tax Form
C corps are impacted differently than other business entities when it comes to tax reform. — Getty Images/ Enterline Design Services LLC

As the most common form of corporations in the United States today, C corporations present a number of advantages and disadvantages for shareholders and owners.

The defining characteristic is that C corporations are taxed on their profits and that any dividends or other gains passed to shareholders is taxable at that individual's personal tax rate. This double taxation of profits is a defining characteristic. Nonetheless, organizing a business as a C corporation offers several benefits.

Pros and cons of C corps

One benefit to this form of incorporation is that it shields directors, shareholders, employees and managers of the corporation from any personal liability for the business, so that legal obligations of the company remain with the company, not assumed by the individual owners.

C corporations also allow for seamless changes in management and ownership, and the businesses can have a large number of shareholders. They also have unlimited ability to deduct state and local taxes, while individuals are limited to deducting $10,000.

The ability to offer public stock allows C corporations to raise large amounts of capital to fund operations and expansions. In addition, C corporations usually have lower tax rates than individuals.

Downsides, beside the double taxation, include registering with the Securities and Exchange Commission (SEC), establishing a board of directors, required annual meetings, and additional paperwork and filing requirements, including legally required financial reporting. Finally, corporate losses stay with the corporation and are not deductible by the owners and shareholders, unlike with an S corporation.

C corporations also are no longer subject to the corporate Alternative Minimum Tax, which had been 20%.

Tax reform impacts on C corps

The biggest change pertaining to C corps in the 2018 tax laws is that the tax rate has been reduced from 35% to a flat 21%.

Previously, $1,000 in profits was taxable at 35% to the corporation, and any dividends passed to shareholders were taxed at a reduced rate of 20%, resulting in an effective 48% tax rate. Under the new law, the same $1,000 is taxed at 21% on the corporate level before dividends are taxed at 20%, resulting in a 36.8% effective tax rate. The result is that a shareholder now nets $63.20 after taxes on each $100 of dividends paid, a gain of $11.20 over previous rates that netted the shareholder $52 on the same $100 dividend.

The new tax rate does not lower taxes for corporations with low levels of profit, which had been taxed at 15% on a graduated scale and will now be taxed at the flat 21% rate. A business making $50,000 would face a tax hike, and the advantage of the new rate will not kick in until the business posts a profit of at least $75,000.

C corporations also are no longer subject to the corporate Alternative Minimum Tax (AMT), which had been 20%, under a separate set of tax calculations designed to limit or eliminate the extent to which a business could claim certain deductions, credits and other tax benefits. According to IRS data from 2013 (the most currently recent), $4.2 billion in corporate AMT was paid that year, primarily in the insurance, finance and mining industries, compared with $293 billion in overall corporate taxes.

This change also affects the ability of C corporations to use the AMT credit, which was earned when a minimum tax paid was carried forward and applied to the business’s tax bill when the liability was more than the AMT amount in any one year. Under the new tax law, any unused AMT credit is refundable. For the years 2018 to 2020, the refundable credit is 50% of the amount over the minimum tax credit. In 2021, the amount refundable rises to 100% of the amount over the minimum tax credit.

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Published February 25, 2019