C Corporation Taxes Explained: Procedures, Flat 21% Rate, Foreign Tax
Credit, Consolidated & Controlled Groups, Estimated Tax, AET, and PHC Tax
(2024 Guide)

1. Procedures: Understanding How C Corporations File and Pay Taxes

Q1. What is a C corporation?

It’s a business that’s legally separate from its owners and files its own tax return with the IRS.

Q2. Which IRS form does a C corporation file?

Form 1120 (U.S. Corporation Income Tax Return).

Q3. Are C corporations the same as S corporations?

No. Both are corporations, but S corporations pass income through to owners, while C corporations pay their own taxes.

Q4. What happens if an INC does not elect to be treated as an S corporation?

It is automatically taxed as a C corporation.

Q5. Do corporations pay taxes the same way as people?

Pretty much — they start with income, subtract expenses, and pay tax on the leftover “taxable income.”

Filing & Payment Basics

Q6. When is Form 1120 due?

The 15th day of the 4th month after the tax year ends (April 15 for calendar-year corporations).

Q7. Can a corporation use a fiscal year instead of a calendar year?

Yes, but it must be consistent and approved.

Q8. How do corporations pay taxes?

Usually through quarterly estimated tax payments during the year.

Q9. Do corporations get a standard deduction like people?

No. They deduct their actual business expenses instead.

Q10. Can a corporation get tax credits?

Yes

Double Taxation Concept

Q11. Why do people say C corporations face “double taxation”?

Because the corporation pays tax on profits, and then shareholders pay tax again when they get dividends.

Q12. Do distributions reduce the corporation’s taxable income?

No. Dividends are not deductible to the corporation.

Additional Corporate Taxes

Q13. Besides regular tax, what other taxes might apply?

The Accumulated Earnings Tax (AET) and the Personal Holding Company (PHC) tax.

Q14. What is the Accumulated Earnings Tax (AET)?

A penalty tax if the corporation hoards profits instead of paying them out.

Q15. What is the Personal Holding Company (PHC) tax?

A penalty tax if the corporation mainly earns passive investment income and doesn’t distribute it.

Elections & Entities

Q16. Can an LLC be taxed as a corporation?

Yes, if it elects to be treated as a corporation.

Q17. Do nonprofits file Form 1120?

No. Tax-exempt corporations use different forms.

Q18. Do foreign corporations file Form 1120?

Only if they have U.S. business income. But the right form will be 1120-F

Q19. Can partnerships file as corporations?

They can elect to, but usually partnerships pass income directly to partners.

Ownership & Shareholders

Q20. Do shareholders pay tax on corporate profits?

Only when profits are distributed as dividends.

Q21. What if shareholders don’t take dividends?

The corporation still pays tax on its income. Shareholders only pay tax if money comes to them.

Q22. Can a corporation deduct salaries paid to shareholders who work there?

Yes, if the salaries are reasonable. That helps reduce taxable income.

Q23. What about personal expenses paid by the corporation?

Those are not deductible and may be treated as taxable income to the shareholder.

Practical Procedures

Q24. How do corporations actually send tax payments?

Using the Electronic Federal Tax Payment System (EFTPS).

Q25. Why is it important to understand C corp tax procedures?

Because mistakes (like late filing, missing estimated payments, or hoarding profits) can lead to extra penalty taxes.

2. Regular Income Tax / New Tax Law for C Corporations

Flat Corporate Tax Rate

Q1. What is the current corporate tax rate?

A flat 21% on taxable income.

Q2. Does this rate apply to all C corporations?

Yes, including regular corporations and personal service corporations (PSCs).

Q3. What’s a personal service corporation (PSC)?

A corporation where most of the work is personal services like accounting, law, health, or consulting, and the employee-owners do the work and own most of the stock.

Q4. Do PSCs get a special higher tax rate?

Not anymore — they also pay the flat 21%.

Q5. Example: If a corporation earns $200,000 taxable income, how much is owed?

$200,000 × 21% = $42,000.

Capital Gains

Q6. Are capital gains taxed differently for corporations?

No, they’re taxed at the same 21% flat rate.

Q7. Can corporations offset capital losses?

Yes, but only against capital gains (not ordinary income).

Q8. Can unused capital losses be carried forward?

Yes, indefinitely, to offset future capital gains.

Q9. Can they be carried back?

No — carryforward only.

Corporate Alternative Minimum Tax (AMT)

Q10. Is there a corporate AMT now?

Yes, for very large corporations (average $1 billion+ income over 3 years).

Q11. What’s the AMT rate?

15% of adjusted financial statement income (AFSI).

Q12. Does AMT apply to small or mid-size corporations?

No, only to those giant ones with $1B+ in income.

Q13. Which corporations are exempt from AMT?

S corporations, REITs, and regulated investment companies.

Q14. Why was AMT reintroduced?

To make sure big corporations with lots of deductions/loopholes still pay at least a minimum tax.

1% Excise Tax on Stock Buybacks

Q15. What is the stock buyback tax?

A 1% excise tax on the value of stock a publicly traded corporation repurchases.

Q16. When did this tax start?

Applies to stock repurchases after December 31, 2022.

Q17. Does it apply to private companies?

No, only publicly traded domestic corporations.

Q18. Are there exceptions?

Yes — no tax if repurchases are under $1M, part of a reorganization, or contributed to employee retirement plans.

Q19. What if repurchased stock is reissued as dividends or bonuses?

Then it may be treated as a dividend and not subject to the 1% excise tax.

Practical Applications

Q20. If a corporation buys back $10M of its stock, how much is excise tax?

$10M × 1% = $100,000.

Q21. Does the excise tax reduce corporate taxable income?

No, it’s not deductible.

Q22. Why does the government tax stock buybacks?

To discourage companies from using profits for buybacks instead of investing in jobs, wages, or dividends.

Examples and Summary

Q23. Example: Little Corp. had $175,000 regular income and $30,000 capital gain. Tax?

($175,000 + $30,000) × 21% = $43,050.

Q24. Do small corporations need to worry about AMT or excise tax?

Usually no — those rules hit giant corporations and publicly traded ones.

Q25. What are the main “new law” items to remember?

(1) Flat 21% rate, (2) 15% AMT for billion-dollar corps, and (3) 1% stock buyback excise tax.

3. Foreign Tax Credit (FTC) for Corporations

Q1. What is the Foreign Tax Credit (FTC)?

It’s a credit that lets a U.S. corporation reduce its U.S. tax bill by the amount of income taxes it already paid to a foreign country.

Q2. Why does the FTC exist?

To prevent “double taxation” — paying tax twice on the same income, once abroad and once in the U.S.

Q3. Is FTC a deduction or a credit?

It’s a credit, which directly reduces U.S. tax owed (better than a deduction).

Q4. Can a corporation choose to deduct foreign taxes instead of taking a credit?

Yes, it can elect each year, but most choose the credit because it’s more valuable.

Q5. Where is FTC claimed?

On Form 1120, using Form 1118 (for corporations).

Q6. What counts as a “qualified foreign tax”?

Taxes on income, profits, or gains — basically taxes similar to the U.S. income tax.

Q7. Do sales taxes or VAT qualify?

No. Only taxes based on net income, not transaction-based taxes.

Q8. What about foreign withholding tax on dividends or interest?

Yes, those usually qualify for the FTC.

Q9. Can you claim FTC on taxes paid to U.S. states?

No, only foreign countries or U.S. possessions.

Q10. Can foreign taxes on excluded income (like the foreign earned income exclusion) be credited?

No, they are not creditable.

Q11. Is there a limit to the FTC?

Yes. You can’t take more credit than the portion of your U.S. tax liability that applies to foreign-source income.

Q12. What’s the formula for the FTC limit?

FTC Limit = U.S. Tax Liability × (Foreign Source Income ÷ Worldwide Income).

Q13. Example: $2,100,000 U.S. tax liability, $1,000,000 foreign-source income, $10,000,000 worldwide income. FTC limit?

$2,100,000 × ($1M ÷ $10M) = $210,000.

Q14. What if foreign taxes paid were $400,000?

Only $210,000 can be used. The extra $190,000 is carried back or forward.

Q15. How long can unused FTC be carried?

Back 1 year, forward 10 years.

Q16. Do partnerships or S corps get FTC?

Yes, but the credit flows through to the partners/shareholders.

Q17. Do estates and trusts get FTC?

Yes, and it passes through to beneficiaries.

Q18. Can a corporation use FTC against the Accumulated Earnings Tax (AET) or PHC tax?

No. FTC only applies against regular U.S. income tax.

Q19. Can a U.S. corporation claim FTC on foreign branch income?

Yes, if that income is taxed both abroad and in the U.S.

Q20. What about foreign corporations?

They only get FTC for foreign taxes paid on income effectively connected with a U.S. trade or business.

Q21. What happens if foreign tax laws aren’t similar to U.S. laws?

Then the taxes may not qualify as creditable.

Q22. What if a U.S. corporation owns 10%+ of a foreign corporation and receives dividends?

The U.S. corporation is “deemed” to have paid its share of the foreign corporation’s taxes and may claim FTC.

Q23. Can the credit ever reduce U.S. taxes to zero?

Yes, if foreign taxes paid are high enough — but never below zero (no refund).

Q24. Is the FTC complicated in practice?

Very. It requires tracking foreign vs. U.S. source income, carryovers, and limits.

Q25. What’s the big-picture purpose of the FTC?

To balance fairness — allowing U.S. companies to compete globally without being punished by double taxation.

4. Consolidated Returns for Corporations

Q1. What is a consolidated return?

It’s one tax return filed for a group of related corporations instead of each filing separately.

Q2. Why file a consolidated return?

It allows profits and losses of different group members to offset each other, lowering overall tax.

Q3. Who files consolidated returns?

An affiliated group of corporations that meet certain ownership rules.

Q4. What form is used?

Still Form 1120, but with consolidated schedules attached.

Q5. Is IRS approval needed to start filing consolidated?

No. Just file a consolidated return — that counts as the election.

Q6. What is an “affiliated group”?

A parent corporation that owns at least 80% of voting power AND 80% of value of at least one subsidiary, plus any other subsidiaries meeting the test.

Q7. Do brother-sister corporations without a common parent qualify?

No, they cannot file consolidated returns.

Q8. Are S corporations included?

No, S corps cannot join consolidated groups.

Q9. Are foreign corporations included?

No, foreign corporations are excluded.

Q10. What about tax-exempt corporations?

No, they are also excluded.

Q11. Do all subsidiaries have to join?

No, but only those included are treated as part of the group.

Q12. Do members have to use the same tax year?

Yes, all members must adopt the parent’s tax year.

Q13. Can group members use different accounting methods (cash vs accrual)?

Yes, but consolidated adjustments must reconcile differences.

Q14. Are intercompany dividends eliminated?

Yes. Dividends from one member to another are ignored, since it’s “inside the family.”

Q15. Can losses in one member offset income in another?

Yes. That’s one of the main benefits of consolidated returns.

Q16. Are charitable contributions consolidated?

Yes, they’re combined and limited at the group level.

Q17. How about dividends-received deductions (DRD)?

Also calculated on a consolidated basis.

Q18. How are capital gains and losses handled?

Netted together across the group.

Q19. What about net operating losses (NOLs)?

Consolidated NOLs can offset group taxable income in future years.

Q20. Can consolidated NOLs carry to years before consolidation?

No. They can only carry forward within years when the group elected consolidation.

Q21. Are gains/losses on sales between members recognized immediately?

No. They’re deferred until the property leaves the group or a triggering event occurs.

Q22. Example: Parent sells property to Subsidiary at a gain. Subsidiary later sells to outsider. What happens?

The group recognizes the combined gain at that point, adjusted for character (capital vs ordinary).

Q23. How about service transactions (e.g., one member provides services to another)?

Those net out within the group.

Q24. Why does the IRS require deferrals on intercompany sales?

To prevent artificial shifting of profits or losses inside the group to reduce taxes unfairly.

Q25. What’s the biggest advantage of consolidated returns?

They treat the affiliated corporations as one economic unit for tax purposes, often lowering overall liability.

5. Controlled Groups of Corporations

Q1. What is a controlled group?

It’s a set of two or more corporations with common ownership that the IRS treats as related for certain tax rules.

Q2. Why does the IRS care about controlled groups?

To stop businesses from splitting into multiple corporations just to multiply tax breaks and lower overall taxes.

Q3. Do controlled groups have to file a consolidated return?

No. They can, but it’s not required. Controlled group rules apply even if they file separate returns.

Q4. What are the main types of controlled groups?

Parent-subsidiary and brother-sister groups.

Q5. Are all corporations eligible?

No — some, like tax-exempt or insurance companies, may be excluded.

Q6. What’s a parent-subsidiary controlled group?

When one corporation owns at least 80% of voting power or value of another.

Q7. Example: P owns 80% of S. Are they a controlled group?

Yes, because P owns 80% of S’s stock.

Q8. What if P owns only 60%?

Then they are not a parent-subsidiary controlled group.

Q9. Can multiple corporations be in the same parent-subsidiary group?

Yes. If each meets the 80% test, they’re all part of the chain.

Q10. What if one corporation in the chain only meets 79% ownership?

Then the chain breaks there — it’s excluded from the group.

Q11. What’s a brother-sister controlled group?

When 5 or fewer people (individuals, trusts, or estates) own a significant portion of two or more corporations.

Q12. What percentage is required?

At least 80% common ownership and more than 50% identical ownership across the corporations.

Q13. What does “identical ownership” mean?

Count the lowest percentage each person owns in both corporations and add those amounts together.

Q14. Example: Two brothers each own 60% of Corp A and 60% of Corp B. Are they a controlled group?

Yes, because they meet both the 80% and 50% tests.

Q15. What if they each own 80% of A but only 20% of B?

No, because the identical ownership doesn’t meet the 50% test.

Q16. Do controlled groups share tax brackets?

Yes. They can’t each claim the full set of corporate tax benefits separately.

Q17. Do they share Section 179 expensing limits?

Yes. The $1,220,000 limit (2024) must be divided among the group.

Q18. Do they share the General Business Credit $25,000 offset?

Yes, it’s shared across the group.

Q19. Do they share the accumulated earnings credit ($250,000)?

Yes, and this one must be split equally by default.

Q20. Can they agree on how to split other shared benefits?

Yes, except the accumulated earnings credit, which must be equal unless the law says otherwise.

Q21. Can one member sell property at a loss to another member?

Not immediately. The loss is deferred until the property leaves the group.

Q22. If a member sells depreciable property to another member, how is the gain treated?

As ordinary income, not capital gain.

Q23. What if corporations set fake prices between each other?

The IRS can step in and reset the prices to an “arm’s length” fair price.

Q24. How does the IRS check transfer prices?

Using methods like comparable market prices, resale prices, or cost-plus markup.

Q25. What’s the big picture of controlled group rules?

To prevent tax abuse by related corporations and ensure the group as a whole doesn’t get extra tax breaks.

6. Estimated Tax for Corporations

Q1. What is “estimated tax” for corporations?

It’s when a corporation pays its income tax in advance throughout the year, instead of waiting until filing time.

Q2. How often do corporations make estimated tax payments?

Four times a year — April 15, June 15, September 15, and December 15 (for calendar-year corporations).

Q3. Do corporations pay taxes the same way individuals do?

Similar idea, but individuals usually have withholding, while corporations must make their own estimated payments.

Q4. What taxes are included in estimated payments?

Regular income tax minus credits and payments, plus other applicable taxes.

Q5. What form is used to figure out estimated tax penalties?

Form 2220.

Q6. How does a corporation figure each quarterly payment?

25% of the lesser of: 100% of last year’s tax (if a full 12-month year), or 100% of this year’s expected tax.

Q7. Can large corporations use last year’s tax to calculate payments?

Only for the first quarter. After that, they must pay based on this year’s income.

Q8. What is a “large corporation” for this rule?

One that had taxable income over $1 million in any of the 3 prior years.

Q9. What happens if a corporation’s income is uneven during the year?

It can use the annualized income method, paying more in quarters when income is higher.

Q10. Can estimated tax be paid all at once?

Technically yes, but most corporations spread it across the four required dates.

Q11. What happens if estimated taxes are underpaid?

The corporation owes an underpayment penalty — basically interest on the shortfall.

Q12. What’s the penalty rate?

Federal short-term rate + 5%. For 2024, it’s 10% for large corporations.

Q13. Can the penalty be waived?

Yes, if tax liability is under $500, if the IRS grants a waiver for good cause, or if the IRS gave a wrong notice.

Q14. Is the penalty deductible?

No, it cannot be deducted.

Q15. Does filing an extension delay payment?

No. An extension to file doesn’t extend time to pay taxes.

Q16. What if a corporation overpays estimated tax?

It can apply the excess to next year’s tax or request a refund.

Q17. Can a corporation get a quick refund of overpaid estimated tax?

Yes, if the overpayment is more than $500 and 10% of expected tax. Use Form 4466.

Q18. What if income rises mid-year and earlier payments were too low?

The corporation must “catch up” in the next quarter.

Q19. What if income falls mid-year?

Payments can be reduced, but risk of underpayment penalty still applies if too low.

Q20. Do seasonal businesses have special rules?

Yes, they can use annualized income to match payments with income flow.

Q21. How do corporations actually make payments?

Through the Electronic Federal Tax Payment System (EFTPS).

Q22. Example: A corp had $4M tax last year but $10M this year. What’s due?

It must pay based on this year’s $10M liability (not last year’s $4M), except Q1 can use last year.

Q23. If the corporation underpays, when does penalty start?

From each quarterly due date until the balance is paid or the return due date.

Q24. Why does the IRS require estimated payments?

To keep tax revenue flowing during the year, rather than waiting until the end.

Q25. What’s the key takeaway about estimated taxes?

Corporations must pay as they go — underpaying risks penalties, while overpaying ties up cash unnecessarily.

7. Accumulated Earnings Tax (AET) for Corporations

Q1. What is the Accumulated Earnings Tax (AET)?

It’s a penalty tax on C corporations that hoard profits instead of paying dividends to shareholders, mainly to avoid shareholder-level taxes.

Q2. What is the tax rate?

20% of accumulated taxable income (on top of regular corporate tax).

Q3. Who pays the AET?

Only C corporations — not S corps, tax-exempt corps, or personal holding companies.

Q4. Why does this tax exist?

To prevent corporations from stockpiling cash just to help shareholders avoid paying personal income taxes.

Q5. When is AET usually triggered?

When earnings exceed the reasonable needs of the business.

Q6. What’s the “accumulated earnings credit” (AEC)?

It’s a deduction that reduces the amount subject to AET, based on either reasonable business needs or a statutory minimum.

Q7. What is the statutory minimum AEC?

$250,000 ($150,000 for certain service corporations like law or accounting firms).

Q8. Does every company get at least $250,000?

Not exactly — prior accumulated earnings can reduce it.

Q9. What if a business has specific future needs?

Documented business plans (e.g., expansion, equipment purchase) can justify retaining more earnings.

Q10. What happens if there are no real business needs?

The IRS may assess AET if earnings look unreasonably high.

Q11. What counts as reasonable business needs?

Things like buying raw materials, expanding facilities, paying off debt, or saving for product liability risks.

Q12. Can buying new equipment qualify?

Yes, if the company has real plans to use it.

Q13. Can saving for business expansion qualify?

Yes, but plans must be realistic and documented.

Q14. Can loaning money to shareholders qualify?

No, that usually signals unreasonable accumulation.

Q15. Can investing in unrelated property qualify?

No — that looks like hoarding wealth, not business planning.

Q16. How is Accumulated Taxable Income (ATI) calculated?

Start with taxable income, adjust for things like NOLs, DRD, federal tax, capital gains/losses, then subtract dividends paid and the AEC.

Q17. What is the role of dividends-paid deduction (DPD)?

It reduces ATI because dividends show profits were distributed, not hoarded.

Q18. Can prior-year excess accumulations be taxed again?

No. Only current-year unreasonable accumulations count.

Q19. Is AET automatically reported?

No. It’s generally assessed by the IRS after an audit.

Q20. Do companies file a special AET form each year?

No. It’s not a self-reported tax like PHC tax.

Q21. What if a company shows written plans for future needs?

The IRS may accept the plans as justification, avoiding AET.

Q22. Is simply keeping cash in the bank a valid reason?

Only if tied to a real business need (e.g., expansion, upcoming large purchase).

Q23. Can large public companies face AET?

Technically yes, but it’s rare — they usually pay dividends or reinvest profits.

Q24. What’s the key takeaway about AET?

C corporations should either distribute profits as dividends or document clear, reasonable business needs for keeping them, or risk a 20% penalty.

8. Personal Holding Company (PHC) Tax

Q1. What is the Personal Holding Company (PHC) Tax?

It’s a 20% penalty tax on certain corporations that mainly earn passive income (like interest or dividends) and don’t distribute it.

Q2. Why does it exist?

To stop people from using a C corporation as a shell to avoid higher individual tax rates on passive income.

Q3. Who does it apply to?

Only C corporations — not S corps, banks, insurance companies, or tax-exempt corporations.

Q4. Can a company be hit with both PHC tax and AET in the same year?

No. It’s one or the other, not both.

Q5. Is PHC tax self-reported?

Yes. Corporations file Schedule PH with Form 1120.

Q6. What’s the “stock ownership test”?

If 5 or fewer shareholders own more than 50% of the stock during the last half of the year.

Q7. What’s the “income test”?

If 60% or more of adjusted ordinary gross income (AOGI) is personal holding company income (PHCI).

Q8. Does a company need to meet both tests?

Yes — both must be met for PHC status.

Q9. Example: A corp earns 70% from dividends and is owned by 4 people. Is it a PHC?

Yes — it meets both the income and ownership tests.

Q10. Example: Same corp but owned by 100 shareholders. Is it a PHC?

No — it fails the stock ownership test.

Q11. What counts as PHCI?

Mostly passive income — interest, dividends, royalties, and certain rents.

Q12. Is rental income always PHCI?

Not always. If rent is a major part of business and meets exceptions, it may not be PHCI.

Q13. Is service income PHCI?

Only if tied to special personal service contracts by 25%-plus shareholders.

Q14. Are capital gains PHCI?

Generally no — they’re excluded from PHCI.

Q15. Are distributions from trusts or estates PHCI?

Yes, they usually count as PHCI.

Q16. What is Adjusted Ordinary Gross Income (AOGI)?

Gross income adjusted for certain items like rents, royalties, and capital gains/losses.

Q17. How is PHC income compared to AOGI?

If PHCI is 60% or more of AOGI, the corp fails the test.

Q18. How is Undistributed PHC Income (UPHCI) computed?

Start with taxable income, adjust for items (like NOLs, taxes, capital gains), then subtract the dividends-paid deduction (DPD).

Q19. What’s the PHC tax rate?

20% of UPHCI.

Q20. Can paying dividends reduce PHC tax?

Yes — dividends reduce UPHCI and therefore PHC tax.

Q21. What are “consent dividends”?

Paper dividends where shareholders agree to be taxed as if they received a dividend, even if no cash is paid.

Q22. What are “throwback dividends”?

Dividends declared within 4½ months after year-end, treated as if paid the prior year.

Q23. What are “deficiency dividends”?

Dividends paid within 90 days after IRS determines PHC liability, to retroactively reduce tax.

Q24. Can preferential dividends be deducted?

No — if dividends aren’t distributed fairly to all shareholders, they don’t count.

Q25. What’s the key takeaway about PHC tax?

If a closely held C corporation earns mostly passive income, it should distribute dividends to avoid the 20% PHC tax.