A normal corporation (sometimes known as a C corporation) is taxed separately from its shareholders. Form 1120 must be filed annually by the corporation to report its income and collect its deductions and credits.
Unlike individual income tax levels, corporation income tax thresholds are not adjusted for inflation. They only alter when Congress passes legislation regarding corporation taxes.
After paying the corporate income tax on the business income, any distributions made to stockholders are taxed as dividends at the stockholders’ tax rates. Wages paid to shareholders are taxed on the shareholder’s individual income tax return.
Due to these two levels of taxation, a standard corporation may be a less appealing business entity than those that transmit income and deductions directly to its owners. Pass-through entities (for federal tax purposes) include sole proprietorships, partnerships, limited liability companies, and S corporations.
Good tax planning, however, can frequently limit the incidence of double taxation while utilizing the business structure to generate additional benefits. Moreover, because the highest individual rate is now higher than the top corporate rate, and because C corporations can retain revenues rather than send the entire amount through to shareholders, a regular corporation may be the best tax-advantaged alternative in some circumstances.
Corporations can accumulate earnings
Because a corporation is a separate taxable entity from its stockholders, the profits remaining after taxation at the corporate level are not taxed to the owners when they are earned, as is the situation with unincorporated enterprises and S corporations. Profits are subject to taxation only if and when they are transferred to stockholders as dividends.
A company cannot, however, hold a limitless amount of income for an unlimited amount of time. Almost any corporation is permitted to amass up to $250,000 in retained earnings tax-free. In addition, the accumulation will not be liable to tax if it is related to a justified business need.