Federal C Corporation Tax Treatment

Corporations are taxed at a rate of 34% on income up to $10 million, without regard to any special rates for corporate capital transactions. There is a surtax exemption that allows corporations with limited income to pay tax at a lower rate as follows: 15% on 1st $50,000 of income, 25% on next $25,000, 34% on next $25,000; however the rate on the next $235,000 is 39% which makes up for the discounted rates allowed on the first $100,000, effectively averaging the overall tax rate at that level to 34%. Net capital gains of a corporation, either short-term or long-term, do not qualify for any special lower tax rates; such gains are simply taxed as ordinary income. The only value of having corporate capital gains is that such gains may absorb capital losses, which cannot offset ordinary income of the corporation.

If two or more corporations have sufficient common ownership to be considered a controlled group according to IRS definition, only one surtax exemption is allowed between or among the corporations, apportioned (divided) in any desired proportion if all members agree to the apportionment plan. If there is no apportionment plan, then the exemption must be divided equally. This can be elected on Schedule O attached to Form 1120.

If you have specific questions about your S corporation or are looking for a tax preparer, please contact us at 724-834-3900.

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Roy & Associates, PC serves clients in western Pennsylvania located predominantly in Westmoreland County, Allegheny County, and Fayette County.

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