A C corporation is a separate taxpayer. It files Form 1120, U.S. Corporation Income Tax Return, and pays tax on its own taxable income. Owners pay tax again when profits are distributed as dividends. The IRS covers corporate tax rules in Publication 542.

Rate and due date

Corporate taxable income is taxed at a flat federal rate of 21%. Form 1120 is generally due on the 15th day of the fourth month after the tax year ends, April 15 for calendar-year corporations. Form 7004 provides an automatic six-month extension to file, but not to pay.

Estimated tax

Corporations that expect to owe $500 or more generally make quarterly estimated payments, due on the 15th day of the 4th, 6th, 9th and 12th months of the tax year. Underpayment penalties apply when installments are too small. We give corporate clients year-to-date taxable income estimates before each due date.

What the return draws from the books

  • Income and deductions from the profit and loss
  • Schedule L balance sheet, which must agree with the books
  • Schedule M-1 or M-3, reconciling book income to taxable income: for example, meals that are only partly deductible, federal income tax expense and differences between book and tax depreciation
  • Schedule M-2, retained earnings activity, including dividends paid

Paying owners

Owner-employees are paid through payroll, and their wages are deductible to the corporation if reasonable. Dividends are not deductible. Some owners prefer to pay themselves wages and retain earnings in the corporation for growth; the right mix depends on personal and business circumstances and should be reviewed with a tax adviser.

Double taxation in practice

Profits paid out as dividends are taxed at the corporate level and again to shareholders. That is why many small businesses choose pass-through structures. A C corporation can still make sense for companies planning to reinvest profits, raise investment or qualify for certain benefits. Our guide to business structure tax considerations compares the options.

Common book-to-tax differences

  • Federal income tax expense is not deductible
  • Penalties and fines are generally not deductible
  • Business meals are generally limited to 50%
  • Depreciation methods may differ between books and return

Our accounting services team keeps the schedules your preparer needs to reconcile these differences.

Year-end bookkeeping checklist for C corporations

  • Reconcile all bank, card and loan accounts through the last day of the tax year
  • Record accrued expenses and unpaid invoices if the corporation uses the accrual method
  • Confirm officer compensation was paid through payroll and matches W-2s
  • Separate dividends from compensation and loans to shareholders
  • Update the fixed asset register for purchases and disposals
  • Review shareholder loan balances, which the IRS may examine closely
  • Prepare a book-to-tax summary of items such as meals, penalties and depreciation differences

Clean books reduce the work needed to complete the balance sheet and reconciliation schedules on the return. The IRS's Instructions for Form 1120 list the schedules that apply at different asset sizes.

Key terms

Definitions for terms used in this guide, from our small business glossary:

  • Retained Earnings: Retained earnings are a corporation's accumulated profits that have not been distributed to shareholders.
  • Accrued Expenses: Accrued expenses are costs a business has incurred but not yet been billed for or paid.
  • Balance Sheet: A balance sheet shows what a business owns, what it owes and the owners' equity at a specific date.
  • Depreciation: Depreciation spreads the cost of a long-lived business asset over the years it is used, rather than deducting it all at once.