A C-corporation pays federal income tax at a flat 21% rate on all taxable income - a rate that has been permanent since the Tax Cuts and Jobs Act of 2017. Unlike pass-through entities (S-corps, partnerships, LLCs), the C-corp pays its own income tax. Shareholders pay a second layer of tax when the corporation distributes profits as dividends - qualified dividends are taxed at 0%, 15%, or 20% depending on the shareholder's income. This "double taxation" is the primary disadvantage of the C-corp structure for closely held businesses. However, OBBBA introduced a new Corporate Alternative Minimum Tax (CAMT) at 15% on adjusted financial statement income for very large corporations - a provision that does not affect most small and mid-size C-corps.
C-corp double taxation example: $1,000,000 of corporate profit. Corporate tax at 21% = $210,000. Distributes $790,000 as dividend to individual shareholder. Qualified dividend tax at 23.8% (20% + 3.8% NIIT) = $188,020. Total tax: $398,020. Effective rate: 39.8%.
S-corp pass-through example: $1,000,000 passes through to individual shareholder. Tax at 37% + 3.8% NIIT on passive portion = up to 40.8% - but NO corporate-level tax. For active owner-operators, SE tax replaces NIIT.
When C-corp wins: Reinvestment businesses where earnings stay in the company (never distributed as dividends) - the 21% corporate rate is lower than the top individual rate. Businesses seeking VC/institutional investment (investors require C-corp). Businesses planning a §1202 QSBS exit (requires C-corp). Businesses with significant employee benefit programs.
A C-corp that retains earnings beyond the reasonable needs of the business may be subject to the accumulated earnings tax at 20% of accumulated taxable income above a $250,000 credit ($150,000 for service corporations). The AET is an anti-abuse rule targeting closely held corporations that accumulate earnings to avoid the double tax on dividends at the shareholder level. Reasonable business needs - expansion capital, working capital needs, debt retirement, and anticipated expenses - justify retention. The IRS scrutinizes accumulations in personal service corporations (law, accounting, consulting, health) more aggressively than manufacturing or capital-intensive businesses.
OBBBA enacted a 15% Corporate Alternative Minimum Tax on the adjusted financial statement income (book income) of corporations with average annual income exceeding $1 billion. This primarily affects large publicly traded corporations, not typical small or mid-size C-corps. The CAMT ensures that large corporations pay at least 15% of their book income as federal income tax regardless of tax deductions and credits that reduce regular taxable income.
A C-corp that owns stock in another domestic corporation and receives dividends can deduct a percentage of those dividends from corporate income - the dividends received deduction. The DRD is 50% for less than 20% ownership, 65% for 20-79% ownership, and 100% for 80%+ ownership (affiliated groups). The DRD prevents triple taxation when one corporation invests in another.