From a legal perspective, C corporations and S corporations are the same. Both are created under state law. Both create personal liability protection for owners (called shareholders). And both are designated to the public by the extensions inc., corp., co., or ltd. But from a federal tax perspective, C corporations and S corporations are very different. Here's how.

Taxpayers

C corporations are separate taxpaying entities. They file their own return (Form 1120) and pay their own taxes. C corporations are subject to a flat 21 percent rate. It is said that C corporations entail a double tax on income: once when the corporation pays tax on their profits, and again when shareholders receive dividends (dividends are not deductible by the corporation).

In contrast, C corporations can elect to be taxed as S corporations. This means they become pass-through entities. While S corporations file their own return (Form 1120S), the corporations' tax items pass through to shareholders who report their share of these items on their own returns (only one level of tax at the shareholder level). This means corporate profits can be taxed at rates of 10 percent to 37 percent, depending on the shareholder's individual tax picture. S corporations can become taxpayers, but only in very limited situations.

Special tax rules

Some tax rules are unique to C corporations, while others apply only to pass-through entities such as S corporations (meaning that owners take the rules into account on their personal returns). Examples of some of the rules created or changed by the Tax Cuts and Jobs Act include:

Tax rules for C corporations:

Tax rules for S corporations:

In addition to differences in tax rules at the federal level, there may be differences in state and local taxes. For example, some states, such as Texas, ignore the S election and tax all corporations in the same manner. And many tax rules are the same for both types of corporations. For example, shareholders who work for their corporations are employees, and payments to them are taxable compensation on personal returns; the corporations' pay employment taxes on them.

Published on: Mar 7, 2019
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