C corporations are separate taxpaying entities, with many tax rules unique to them. In the federal government's 2017 fiscal year, there were more than 2 million C corporations. They include small businesses as well as multinational corporations. All of these C corporations face an array of tax changes created by the Tax Cuts and Jobs Act.
1. Tax rates
As of January 1, 2018, C corporations have a flat 21 percent tax rate, as compared with former graduated rates up to 35 percent. However, fiscal year corporations with a tax year including days in 2017 must use a blended rate. This means graduated rates apply to the portion of the tax year falling within 2017 and a flat 21 percent rate for the portion of the year in 2018.
Until now, C corporations (other than "small corporations") faced a 20 percent alternative minimum tax (AMT) if it was greater than their regular tax. However, the corporate AMT has been repealed as of the end of 2017. As in the case of tax rates, fiscal year C corporations must still deal with the AMT for the portion of their tax year that includes days in 2017.
3. Executive compensation
In order to be deductible, compensation to employees, including executives, must be "reasonable" based on the facts and circumstances. However, the deduction on compensation to certain executives in publicly traded corporations is capped at $1 million per an executive who is considered to be a "covered employee." The new law expanded the definition of covered employee to include anyone who previously was treated as such.
4. Limits on business interest
Corporations that finance their activities through loans, mortgages, credit cards, and lines of credit are now limited in how much interest they can deduct. This is so regardless of when the borrowing occurred. Under the new law, there's a 30 percent limit on the deduction for business interest expense. This means interest is deductible only to the extent of business interest income, 30 percent of adjusted taxable income, and floor-plan financing (e.g., financing used by car dealerships).
However, some corporations do not have to limit their interest expense deduction:
- Small businesses (those with average annual gross receipts in the three prior years not exceeding $25 million) are automatically exempt from the 30 percent limit.
- Utility companies are also automatically exempt.
- Farming and real estate businesses that cannot meet the $25 million gross receipts test for small businesses can elect to be exempt. If so, they are limited in how they depreciate certain property.
There are many other new tax rules for corporations. For example, a number of international tax reforms will effect multinational corporations. The IRS has a information page for international taxpayers and businesses explaining many of these new rules.
What hasn't changed for C corporations are the rules for paying taxes. You'll want to review the new changes, project your tax bill, and pay your estimated tax accordingly to minimize or avoid estimated tax penalties.